Weekly Markets
Precious Metals - Oil
Other Commodities - Currencies
Bonds - Stocks

Weekly Commentary
The Elephant in the Living Room

Opinions
- Sir Anthony O' Reilly warns that we are in a "Second World War" which is a "a major battle for economic prosperity and survival."
- Greenspan discusses 'Housing Bubbles.'
- Bank of England cautions on Financial Derivatives.
- McWilliams warns of possibility of US Economy Imploding Argentina Style

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Weekly Markets

The stock bulls had a good week this week.
The Dow and the S&P were up four days in a row and some 3% for the week.
However, the bond markets failure to sell off with a corresponding rise in yields suggests many investors are not convinced of the sustainability of the US economic recovery.
Commodities and precious metals were largely unchanged for the week but oil was down a significant 3.84% for the week.

Precious Metals

Gold was down by $2.40 or 0.57% for the week. From $419.70 to $417.30 per ounce.

Silver was very volatile and rallied sharply before settling up for the week, from $6.91 to $6.94 per ounce. It was up 0.4%.

Platinum (July) was down marginally, finishing at $862.50 from $865 per ounce

Palladium (June) was down also down marginally from $188.50 to $187.75 per ounce.

'A close below $418 will not look good on the charts,' said James Moore of TheBullionDesk.com. He targeted short-term weakness in the precious metal down to the 410-to-415 USD range.

Gold in dollar terms took out its massive wedge formation to the downside, but only marginally. This could mean that gold may retreat to $410 or possibly even $400 in the short term. However, gold in Euro terms has remained strong at EUR332.82 and this continuing strength of gold in EUR terms may mean that the recent slight sell off in gold may be due to the USD's recent strength rather than weakness in gold per se.

Short term indicators look good for gold as sentiment is overwhelmingly bearish which means most of the short term buyers have thrown in the towel and thus there is a lot of room for the longs to re enter their long positions.

Thus if gold reverses back up, which I believe it will, this be reviewed as a false breakdown.

Reuters reported how "gold demand in India, the world's largest consumer, has surged this week because of lower prices and strong wedding season demand, traders said on Tuesday. Jewellers were placing large orders and banks were running out of ready stocks, they said... Gold buying has jumped to 1,000 to 1,500 kg a day in Ahmedabad from 500 kg during the off season. In Jaipur, the capital of Rajasthan state, gold imports have doubled to 1,000 kg... 300 kg of gold was being sold everyday in Madras compared with 175 kg in April."

A glance at the rupee/gold chart shows why. Gold has recently only been lower in the first few days of February this year - when demand was stupendous - and prior to that early last year. These sorts of stories are rare and are invariably associated with lows.

There are similar if vaguer references in various commentaries speaking of the Middle East and South East Asia.

Even Japan's futures traders became active on finding the active contract back below Y1500/g. On volume equal to 14,826 Comex lots (132% above Monday) open interest rose 465 Comex lots, but according to the Mitsubishi data, the public added 6.2 tonnes (1,993 Comex) to their long. The active contract closed down 2 yen, but world gold went out $1.20 above the NY close.

Shorting into the type of physical market that has developed is very unhealthy.

Oil

Oil was again massively volatile and ended down 3.84%. The price for a barrel of oil fell from $48.67 to $46.80. For the week, oil is down by $1.87.

Chinese, Indian and Asian demand for energy is continuing unabated and is forecast to continue to grow exponentially. The urbanisation of China and India is creating massive demand for motorcycles and cars by the burgeoning middle class commuters which means it is unlikely we will ever experience the record low prices of the late 1990's.

Exxon Mobil has released projections predicting global energy demand will increase by 50 per cent by 2030. This coincides with a growing realisation that the peak oil supply has been reached or will be reached very soon which may result in what oil analysts have called a permanent high plateau.

Geopolitical issues in Venezuela, Russia and the Middle East may also affect the supply side of the equation.

Other Commodities

Reuters Commodities Research Bureau's Index was largely unchanged from 293.85 last Friday to 293.28.
The CRB's year to date gains are at 3.3%.
Since hitting a low of 182.83 in October 2001 it is up some 65%.

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 down 2.2%. 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 9.9% year to date.

One of the most important indicators for commodity prices is copper. Copper rallied 1.7 pct.

Should copper prices and the wider commodity indexes resume their downtrend it may indicate that deflationary forces are overcoming inflationary forces in the wider global economy. Precious metals are the only commodities, and one of the few asset classes, which perform well in both inflationary and deflationary economic conditions.

Helen Yuan and Xiao Yu of Bloomberg reported how "China's imports of steel products rose to a one-year high in April, indicating efforts by the government to cool economic expansion isn't dampening demand from makers of home appliances and cargo containers. China imported 2.56 million tons of steel products last month."

July copper futures settled 1.20 cents higher at 137.50 cents per pound.

Arabica coffee futures for July settled up 0.20 cent at $1.17 a pound on the New York Board of Trade and September closed up 0.30 cent at $1.20 a pound.

Cocoa futures for July settled $6 lower at $1,440 a metric ton.

World raw sugar futures for July settled 0.06 cent higher at 8.59 cents a pound.

Chicago Board of Trade July corn settled 3.75 cents higher at $2.13.25 a bushel.

July soybean futures settled 2.75 cents higher at $6.32 a bushel.

The CBOT's new South America soybean futures contract, or SAB, traded more than 200 lots on Friday's launch day, brokers said.

July SAB closed at $6.41 per bushel, August ended at $6.44, and September closed at $6.53.

CBOT July wheat settled up 3.50 cents at $3.13 per bushel.

Currencies

The U.S. dollar index gained 0.44 points to 86.61 Friday, a new 7 month high. The dollar index gained0.58%, as the dollar rally continued.

The euro index lost 0.9 points to 125.45 Friday, a new 7 month low. The euro is lower by 0.65% for the week.

The British pound was down 1.3% due to disappointing economic figures in the UK.

The Japanese yen lost 0.58 points to 92.37 Friday, a new 5 week low. For the week the yen is lower by 0.87%.

The Brazilian real rose 1% to a 3-year high. The Iceland krona rose 2.3%, recovering some of its recent steep decline. On the downside, the South African rand declined 3%, the Hungarian forint 1.6%.

China further denied imminent plans for a Yuan revaluation as pressure by the US continues, though eventual revaluation is likely to happen sooner rather than later. The market will likely view this as dollar negative. Add to this recent comments from other major trading partners like Russia, South Korea, India, and Japan who all have expressed a desire to diversify their foreign reserves, which means they plan to hold or buy fewer U.S. dollars in the future.

Bonds

The treasury and bond markets were largely unchanged and did not sell off, with a consequent rise in yields, as is the norm when the stock market rallies strongly.

The 10-Year Treasury note yield was largely unchanged for the week at 4.125%.

Five-year Treasury yields were rose 5 basis points, ending the week at 3.87%.

Two-year Treasury yields ended the week up 7 basis points to 3.66%.

Long-bond (30 year) yields dropped 4 basis points to 4.44%.

The spread between 2 and 30-year government yields declined from 89 to 78.

The US Current Account and Trade Deficits

Bill Gross who is the manager of PIMCO, the largest bond fund in the world, recently told the Financial Times, "But when over 50% of outstanding US Federal debt is held by foreign creditors, then the rules of the game can change."

The US Treasury report showed that foreign central banks became net sellers of U.S. assets for the first time in 19 months in March, helping to slow foreign capital inflows into the United States by a large 46%. Net capital inflows fell to $45.7 billion in March from $84.1 billion in February. Read the full report.

It was the lowest level of capital inflows since October 2003 and was the first time since October 2004 that foreign inflows have fallen short of the U.S. trade deficit for the month. The trade gap was $55 billion in March.

The United States demands nearly $2 billion a day in foreign capital to finance its current account deficit. So far, the requirements have generally been met and thus U.S. interest rates remain very low.

"The report strikes at the heart of the worries of the swelling trade deficit and the long term prospects for its financibility," said Ashraf Laidi, chief currency analyst for MG Financial Group.

Asian banks have stopped buying the humongous levels of US debt of recent times which have allowed the 'drunken sailor spending' of this fiscally irresponsible US government.

What has been happening is that China, Japan and Asia's middle classes work and save and their governments have bought trillions of dollars of U.S. Treasury bonds. This low-interest debt has helped keep interest rates low in the US and help support the spending habits of both the U.S. government and American consumers. They in turn buy Asian and Chinese-manufactured goods at Wal-Mart, which has kept the whole cycle going.

But the data released last week showed that this process is beginning to end with Asian savers starting to curtail their purchases of US Treasury debt. There has been a significant increase in purchases of US Treasury debt from the Caribbean. It is suggested that these are purchases by large hedge funds and that they are short term purchases and due to the herd like trend following behaviour of hedge funds these trades may be unwound as quickly as they have been put in place.

The US is now the largest debtor the world has ever seen and it's economic destiny is in the hands of it's creditors. These creditors are becoming increasingly nervous about their savings and the health of the US dollar and the US economy.

Dollar ignores inconclusive data - Financial Times
Investor gloom gathers over world economy-Merrill - Reuters, 17-05-05
Fears for dollar as central banks sell US assets - Financial Times, 17-05-05
U.S. capital inflows slow in March - CBS Market Watch, 17-05-05
International Investors Add U.S. Assets at Slowest Pace Since October 2003 - Bloomberg
Pirates of the Caribbean - Kirby, Safe Haven
Pirates Reprise - Kirby, Safe Haven
How Japan financed global reflation - Duncan, Gold Eagle
Foreign investment slowest since '03 - Chicago Tribune

Bizarrely, the figures released by the US Treasury last Monday for March 2005 contradict and are different to previous figures released. They seem to have been altered after the fact and as of yet there has been no official or non official explanation for the massive discrepancy in the figures.

These major alterations are particularly glaring with regard to the major buyers of US Treasury debt. The tables of MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES can found here and here.

The figures for smaller countries have also changed. Ireland is one of the largest buyers of US Treasuries on a per capita basis. The first report showed that Ireland's holding of US Treasury debt as of January '05 was at $21 billion. The second report showed that their holdings for the same period, January '05, had dropped to $15.6 billion. This restatement has not been explained by the US Treasury Department. Either this is a major statistical error or the US has some very forgiving creditors.

The chart below shows the continuing deterioration in the US Current Account balance and of US manufacturing. The US current account is now at record levels at some 6% of GDP. It has been pointed out that when the US current account deficit hit it's record levels, near 3.4% of GDP in 1987, there followed Black Monday and the October Stock Market Crash. Many analysts believe that the record current account deficits were a contributory factor in the stock market declines.

Stocks

The stock markets were largely up. The Dow and S&P were up 4 days in a row (before their streak ended with slight losses on Friday) and the Nasdaq 6 days in a row.

The Dow Jones Industrial Average was up from 10,140 to 10,472; up 3.27% for the week.
The S&P 500 Index, of more significance than the DOW, was up 3.05%; from 1154 to 1189.28.
The Nasdaq Composite was up 3.52% for the week to 1976.8 after a late day rally on Friday.

The FTSE was up 1.7% and the ISEQ was up 2.1%.

The broader US stock market experienced strength also.

The Transports were up strongly by 6.5%.
Utilities were up 2%.
The Morgan Stanley Consumer index was up by 3%.
The Morgan Stanley Cyclical index was down by 4%.
The small cap Russell 2000 and S&P400 Mid-cap indices were up 5% and 4% respectively.
The NASDAQ100 and the Morgan Stanley High Tech index were up some 4%.
The Semiconductors were also up 4%.
The Street.com Internet Index and NASDAQ Telecommunications indices were up 5% and 4% respectively.
Biotechs were up 3%.
The Broker/Dealers were up 5% and the Banks were up 3%.
The XAU Index of large precious metal mining stocks was up 2.2%.
The HUI (AMEX's Gold BUGS index) a basket of unhedged gold and silver stocks was up 2.2%.
The strength in the precious metal stocks despite gold's small sell off may mean gold may be ready to make a move up as oftentimes precious metal stocks signal ahead of time a move in the metals themselves.

The one sector that experienced weakness was the retail sector due to concerns regarding the health of the US consumer.
It is broadly accepted that due to record debt levels and record low savings levels US consumer spending will slow.

Just 10 years ago the savings level in the US was 6% whereas today it is 0%. In 2001, the U.S. savings rate ranked 22nd out of 25 OECD countries. Today it is believed to be lower. Conversely, the Chinese save some 40% of their income. The hope is that US business spending will increase to supplant US consumer spending.

Walmart (WMT) is the largest retailer in the world and it's shares were down marginally for the week despite the strength in the rest of the stock market. In the last 5 months it is down some 20% to $47.18. Increasing protectionist sentiment in the US congress and in the Bush administration does not bode well for the retailing sector.

Also if and when China revalues the yuan it will make Walmart and other retailers goods more expensive and thus create even more inflation which the US consumer may be ill equipped to cope with.

Other Credit and Money Supply Indicators

Broad money supply (M3) declined $5.7 billion to $9.584Trillion (week of May 9). Year-to-date, M3 has expanded at a 3.3% rate, with M3-less Money Funds growing at 5.5% pace. For the week, Currency dipped $0.9 billion. Demand & Checkable Deposits added $2.6 billion. Savings Deposits fell $15.9 billion. Small Denominated Deposits gained $4.2 billion. Retail Money Fund deposits dipped $1.9 billion, and Institutional Money Fund deposits declined $8.0 billion. Large Denominated Deposits dropped $8.8 billion. For the week, Repurchase Agreements rose $13.8 billion, and Eurodollar deposits gained $9.3 billion.

Bank Credit rose $10.9 billion last week, increasing the year-to-date expansion to $305.8 billion, or 12.4% annualized. Securities Credit is up $123 billion, or 17.5% annualized, year-to-date. Loans & Leases have expanded at a 10.2% pace so far during 2005. For the week, Securities surged $15.2 billion. Commercial & Industrial (C&I) loans added $3.2 billion. Real Estate loans gained $2.6 billion. Real Estate loans have expanded at a 12.6% rate during the first 19 weeks of 2005 to $2.67 Trillion. Real Estate loans are up $290 billion, or 12.2%, over the past 52 weeks. For the week, consumer loans declined $3.5 billion, and Securities loans fell $5.2 billion. Other loans dipped $1.4 billion.

Total Commercial Paper surged $16.6 billion last week (up $29.7bn in 2 wks) to $1.51 Trillion. Total CP has expanded at an 18.5% rate y-t-d (up 12.5% over the past 52 weeks). Financial CP jumped $14.1 billion last week to $1.363 Trillion, with a y-t-d gain of $78.9 billion (16% ann.). Non-financial CP gained $2.5 billion to $151.2 billion (up 28% in 52 wks). The expansion of CP, especially financial sector borrowings, is one factor explaining the lagging monetary aggregates.

Fed Foreign Holdings of Treasury, Agency Debt rose $4.7 billion to $1.404 Trillion for the week ended May 18. "Custody" holdings are up $68.3 billion, or 13.3% annualized, year-to-date (up $204.3bn, or 17.0%, over 52 weeks). Federal Reserve Credit expanded $4.3 billion to $787.6 billion. Fed Credit has declined 1.0% annualized y-t-d (up $47.1bn, or 6.4%, over 52 weeks).

ABS issuance was a solid $13.4 billion (from JPMorgan). Year-to-date issuance of $246 billion is 13% ahead of comparable 2004. At $155 billion, y-t-d home equity ABS issuance is 24% above the year ago level. (Noland, Prudent Bear)

Commentary

The Elephant in the Living Room

It is becoming increasingly obvious that there are fundamental economic challenges facing the global economy and especially the economies of the western world. These include unprecedented US trade and current account deficits, record debt levels, rising oil prices, the prospect of rising interest interest rates and an increasingly vulnerable global reserve currency.

The possibility of a burgeoning financial crisis has been spoken and written about by a litany of the most respected economic figures and institutions in the world today.

Alan Greenspan, his predecessor Paul Volker, Robert Rubin, Sir Tony O'Reilly, George Soros, Stephen Roach (chief economist of Morgan Stanley), Bill Gross (manager of the largest bond fund in the world), US Comptroller General David Walker, Warren Buffet, Martin Wolf (Associate Editor and Chief Economics Commentator, Financial Times) the editors of the Washington Post and New York Times and institutions such as the Bank of England, IMF, World Bank and OECD have all warned of the serious macroeconomic challenges we all face. The reaction of many economic commentators has been to ignore the warnings and the substantive points being made about the risk posed by the significant macroeconomic risks.

Economic wishful thinking is fine and of course we all hope there is a gradual readjustment in the large financial imbalances in the global economic system and the recent economic paradigm of low inflation and high growth continues. However, it is highly irresponsible not to acknowledge these fundamental economic realities. Ignoring the 800 pound gorilla or the elephant in the living room and putting a false benign spin on economic reality helps to lull people into a false sense of economic security. These people become non rational economic agents resulting in a non rational market place. This distorted marketplace results in misallocations of capital and increasing bubbles in various asset classes.

Occasionally lesser mortals than the illustrious men listed above who have voiced similar economic warnings advising financial caution and prudence have been dismissed as 'Cassandras or being 'gloomy'. This is a way of 'attacking the man and not the ball' in order to detract from and avoid the substantive economic issues at stake and shows a level of irresponsiblity.

It is worth noting that Cassandra herself did have the gift of prophecy and was right in her predictions and her terrible affliction was that despite knowing what would befall her countrymen no one would listen to her. Cassandra correctly warned not to allow the 'Trojan Horse' into the city and prophesised the fall of her native Troy and no one listened to her. The irony is that had her prophecies and explicit warnings been listened to and cautious and prudent measures taken in advance her warnings and prophecies might not have come true.

It is also worth noting that the first sellers of comprehensive health insurance in the US - Massachusetts Health Insurance of Boston in 1847, were also called 'cassandras' who focussed on the 'negative' possibility that one could get seriously ill in order to garner profit. Modern sellers of car, health and other forms of insurance no longer have to spell out the blindingly obvious reality that there are unforeseen, non linear events that occasionally happen such as September 11th, the Boxing Day Tsunami and the Stock Market Crash of 1987. And that one should take precautions against such possible eventualities.

It is now taken for granted that one should be cautious and prudent and always have insurance 'just in case'.

Many economic commentators are reluctant to discuss these challenges. Some are naive and ill informed while with the majority there is a forlorn hope that these economic realities will gradually correct themselves and we can all return to the massive levels of economic growth and prosperity experienced by the First World in the 1990's.

Hoping for a continuance of this economic status quo is understandable. Ignoring economic realities is not.

Whether those dismissed as modern day economic pessimists are proved right or wrong is irrelevant. What is relevant is how we react to these economic realities in order to protect ourselves materially 'just in case' those issuing warnings are proved correct.

Opinions of the Week

"Asian economies are growing while Europe and the US are in decline . The solution is for the major economies to adjust their currencies to levels which reflect today's economic reality. There is a general feeling that Europe, particularly "old Europe" as a manufacturing and potentially services area, is, or will become, increasingly uncompetitive...

Essentially this means that manufacturing and services in Europe will be a shadow of their former selves...
In the medium and long term - not to speak in certain cases of the short term - this bodes ill for Ireland, and for Europe. The question is what can be done about it?...

There are a number of answers, not least being a growing sense of awareness both in Europe and the US, that they are engaged, as assuredly as they were in the Second World War, in a major battle for economic prosperity and survival. Simply stated, as we contemplate this growing struggle... it becomes clear that companies act in this way [relocate] because European and US currencies are overvalued in relation to Asian currencies, particularly the Chinese yuan. The solution to this is a major and organised adjustment of currency parities. Otherwise, there is a risk of a drift to protectionism, as is actively being pursued in the US Senate today (and as happened, to drastic effect, in the 1930's with the Smoot-Hawley Act in the USA...

I believe therefore that all the major parties, the EU, Britain, USA, China and Japan should urgently organise a major conference along the lines of the Plaza/Louvre Accords of 1985 and 1987 which would indicate that the parties believe is fair value for a basket of currencies for a period of say, 5 years, and a concurrent declaration that they will act in concert against any speculation or gross overvaluation of a particular currency against it's neighbours.

Such a declaration will bring economic stability and growth to the world on a steady and measured basis.

Nothing else will."
Asian economies are growing while Europe and the US are in decline - Sir Anthony O'Reilly, The Sunday Independent

"In some ways, the 19th-century version of the global capitalist system was more stable than the current one.
It had a single currency, gold; today there are three major currencies crashing against each other like continental plates."
Ominous: The US Deficit V's the US Dollar - Jack Crooks quoting George Soros, The Crisis of Global Capitalism

"Some regions of the U.S. housing market are showing signs of unsustainable speculation and froth based on fast turnover of existing homes.... The price surge may simmer down as housing becomes less affordable.... It's pretty clear that it's an unsustainable underlying pattern...

People are reaching to be able to pay the prices to be able to move into a home...

There are a few things that suggest, at a minimum, there's a little froth in this market. While we don't perceive that there is a national bubble, it's hard not to see that there are a lot of local bubbles.''
Alan Greenspan on the US Property Markets

"In the end, we cannot eliminate the risk inherent in mortgages with refinancing options. But we can markedly contain the accompanying risks to systemic stability by diversifying the concentration of risk away from large, highly leveraged portfolios for which misjudgments can have quick and devastating consequences. A system of diversified and less-leveraged interest-rate-risk management would be far more resilient to the inevitable mistakes and shocks of individual risk-mitigating strategies. Such diversification would thus pose much less systemic risk, largely because of lowered leverage, which in turn is the consequence of the private-market discipline imposed on commercial and investment banks, mutual funds, insurance companies, and other current or potential holders of mortgage-backed securities...

Without the needed restrictions on the size of the GSE (Government Sponsored Enterprises - Mortgage Providers) balance sheets, we put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for housing.

Financial instability coupled with the higher interest rates it creates is the most formidable barrier to the growth, if not the level, of homeownership. Huge, highly leveraged GSEs subject to significant interest rate risk are not conducive to the long-term financial stability that a nation of homeowners requires."
Alan Greenspan on the risks posed by the huge government sponsored mortgage companies

"Since the end of 2003, the rise in the value of imported oil--essentially a tax on U.S. residents--has amounted to about 3/4 percent of GDP. The effects were far larger in the crises of the 1970s. But, obviously, the risk of more-serious negative consequences would intensify if oil prices were to move materially higher."
Alan Greenspan on rising oil prices affects on the US Economy

"Over the last few years China, for its own reasons, has acted as an enabler both of U.S. fiscal irresponsibility and of a return to Nasdaq-style speculative mania, this time in the housing market. Now the U.S. government is finally admitting that there's a problem - but it's asserting that the problem is China's, not ours.

And there's no sign that anyone in the administration has faced up to an unpleasant reality: the U.S. economy has become dependent on low-interest loans from China and other foreign governments, and it's likely to have major problems when those loans are no longer forthcoming...

Here's what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise; the housing bubble will probably burst; construction employment and consumer spending will both fall; falling home prices may lead to a wave of bankruptcies. And we'll suddenly wonder why anyone thought financing the budget deficit was easy.

In other words, we've developed an addiction to Chinese dollar purchases, and will suffer painful withdrawal symptoms when they come to an end.

I'm not saying we should try to maintain the status quo. Addictions must be broken, and the sooner the better. After all, one of these days China will stop buying dollars of its own accord. And the housing bubble will eventually burst whatever we do. Besides, in the long run, ending our dependence on foreign dollar purchases will give us a healthier economy. In particular, a rise in the yuan and other Asian currencies will eventually make U.S. manufacturing, which has lost three million jobs since 2000, more competitive.

But the negative effects of a change in Chinese currency policy will probably be immediate, while the positive effects may take years to materialize. And as far as I can tell, nobody in a position of power is thinking about how we'll deal with the consequences if China actually gives in to U.S. demands, and lets the yuan rise."
The Chinese Connection - Krugman, New York Times

"A PERFECT STORM. That's what one of Washington's top lobbyists tells me is brewing. It might blow away the decades-long consensus in favour of free trade. It is not only that the Treasury used its latest report to Congress on exchange-rate policies to warn China to unpeg its currency from the dollar, or else. The Treasury was unusually blunt: "Current Chinese policies are highly distortionary ... The peg blocks the transmission of critical price signals (and) impedes needed adjustment of international balances.... What converts this from your garden variety trade dispute into a more significant threat to America's relations with China, and to the Doha round of trade-opening talks, is the powerful protectionist coalition that is forming.... Trade watchers should focus on three dates: the July vote on the Schumer proposal; the September meeting in Washington of the American and Chinese presidents; and the October Treasury report on currency manipulation that could set the stage for retaliation. If the Chinese cannot find a way to make concessions without losing face, and Bush cannot find a way to hold off the protectionists, the free-trade system as we know it just might not survive."
Perfect Storm: America heads for showdown on China Trade - Stelzer, The Sunday Times

"Real wages in the US are falling at their fastest rate in 14 years, according to data surveyed by the Financial Times by the Economic Policy Institute. Inflation rose 3.1 per cent in the year to March but salaries climbed just 2.4 per cent, according to the Employment Cost Index. In the final three months of 2004, real wages fell by 0.9 per cent."
US real wages fall at fastest rate in 14 years -Financial Times

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K."
Edward A. J. George, Ex Governor of the Bank of England, Director of the BIS

"The money supply (which is hardly ever mentioned in polite company anymore) has hit the wall, And while we're not high-church monetarists, a collapse in money growth always has presaged an economic slowdown and a punk market."
Randall W. Forsyth, "Up and Down Wall Street", Barron's

"Three long-term trends are threatening to bankrupt America: the burgeoning costs of waging the war on terrorism, the U.S. economy's increasing reliance on foreign capital, and rapid aging throughout the developed world. Washington must understand that committing the United States to a broader global role while ignoring the financial costs of doing so is deeply irresponsible.... The United States is now borrowing about $540 billion per year from the rest of the world to pay for the overall deficit funding Americans' consumption of goods and services and US foreign transfers. This unprecedented current-account deficit is paid through direct lending and the net sales of US assets to foreign business or persons: everything from stocks and bonds to corporations and real estate. The United States imports roughly $4 billion of foreign capital each day, half of that to cover the current-account deficit and the other half to finance investments abroad. At 5.4% of GDP [gross domestic product] in the first quarter of 2004, the deficit is substantially higher than its previous record (3.5% of GDP) in 1987, when the dollar fell by a third and the stock market took its "Black Monday" plunge."
Riding for a Fall - Peter G Peterson, Chairman of the Council on Foreign Relations, the Institute of International Economics, Foreign Affairs Magazine

"Well our reality-based fairytale must now come to a close. The one reality we are sure of is that we at PIMCO are most fortunate to be entrusted with the management of your assets. The responsibility, while heavy, is the reason we are in business. Thank you. As to happy endings in the global economy and financial markets? Well some assets - high quality bonds, and certain commodities in limited supply among them - may continue to do well; other risk-oriented holdings can be pumped only a little bit further. And then? Well, given appropriate steps from government policymakers that attempt to rebalance our decidedly imbalanced global economy, we can still continue to prosper, but as with most fairytales, the wicked witch lurks. For now we at PIMCO will be content to acknowledge our reigning King's clothes, the poor quality of the stitchery, and the partial exposure of his bare-bottom displayed on our front cover. Stay tuned in future years. This may yet turn into a reality show that resembles not the Coppertone Girl but Uncle Sam with a crown on his head and not much else to show for his/our years of profligate consumption based upon Bretton Woods II and the leveraging of near costless finance."
Investment Outlook: The Strange Tale of the Bare-Bottomed King - Bill Gross, Managing Director, PIMCO

"The upsurge in new financial instruments may be changing the relationship between debt and equity markets in ways that are still hard to fathom. . . . This is not yet a crisis. But these are early days, and it seems that relatively few positions have been successfully unwound yet. It is possible that some time next autumn a couple of big banks will announce big losses in their prime-brokerage and proprietary-trading businesses - and if this were to raise their cost of funding substantially, it could begin to be a crisis.

On a less cataclysmic note, however, all markets overshoot, and new instruments and risk-control techniques, plus new participants, make it more likely. So another possibility, suggests Mark Kiesel of PIMCO, an American bond-investment firm, is that hedge funds and dealers will have their wrists badly smacked, learn a lesson and dedicate themselves henceforth to fundamental credit analysis and due diligence. PIMCO is looking to make profits by picking up and holding debt whose spread has widened further than it should have in the general conflagration. Others will follow suit. As you see, Buttonwood strives always for cheer."
A New Conundrum - Buttonwood, The Economist, 18-05-05

"Disaster can strike from what appears to be "clear blue sky", as in the stock market crash of October 1987, as well as more literally on September 11, 2001. On closer examination, at the time and since, the 1987 episode stemmed from imbalances in the world economy that led to a sharp fall in the dollar, which in turn triggered the crash.

Comparable international imbalances exist today. America's unusually large budget and trade deficits need a flow of funds from Japan and China that can be turned off rapidly. But the expectations reflected in share ratings worldwide are much lower than in 1987.

Derivatives and hedge funds are more credible agents of a self-feeding crash. In a speech on financial-disaster planning this week, Sir Andrew Large, Deputy Governor of the Bank of England, noted that credit derivatives have spread so fast that no one is quite sure where concentrations of risk now lie. Financial assets based on derivatives also make credit markets more vulnerable.

As Sir Andrew admitted, no disaster planner was likely to have foreseen that Russia's loan default of 1998 would quickly lead to the system-threatening failure of the huge LTCM hedge fund in New York. LTCM was not heavily into Russian debt, but it had laid bets elsewhere on interest rates converging.

Not many could have foreseen that General Motors shares would enjoy their biggest one-day rise in 40 years, thanks to the intervention of Kirk Kerkorian, the renowned speculator, just 24 hours before GM bonds were relegated to junk status. A trading strategy of being long on the bonds and short on the shares would not have been clever.

Last weekend, rumours circulated of several highly leveraged funds in trouble or suffering embarrassing withdrawals by worried investors. Few yet suggest that hedge funds will suffer damage on the scale of LTCM. It could happen, but it is worth remembering the wider consequences in 1998."
Don't Panic, It may never happen - Graham Searjeant, Personal Investor, The Sunday Times

"We are heading into a slowdown and slowdowns inevitably put pressure on the world's financial system. So where will this hit?... If you ask in the City of London where any financial crash will come from, the answer top of the list will be hedge funds."
Horses a better bet than hedge funds? Too early to tell - McRae, The Independent

"Credit risk transfer has introduced new holders of credit risk, such as hedge funds and insurance companies, at a time when market depth is untested. ... The growth of derivative instruments and advent of a range of new asset classes, despite added dispersion and better risk management, have added to the risk of instability arising through leverage, volatility and opacity."
Sir Andrew Large, Deputy Governor of the Bank of England
Bank of England warns of 'threat to markets' - The Times

"Is the global outlook improving or not? Is everything hunky dory or about to implode?...
the Pope of Mammon is the man responsible for the expansionary monetary policy of the US - and, by extension, the western world - over the last decade. Greenspan has overseen the creation of more money than anyone else, ever. The result has been a prolonged period of economic expansion and, very significantly, the avoidance of several potential catastrophes...

History suggests that this cannot last.

The longer it carries on, the worse the ultimate come-uppance will be. Yes, it is still very unlikely that the US economy will implode Argentina-style. But the mere fact that one can suggest a parallel of any sort between US 2005 and Argentina 2001 is instructive.

I'm not surprised the markets are confused.

The reason equities are rising is the same reason property is rising - because there is abundant credit out there driving prices. Can bonds and equities go up at the same time indefinitely?

Well, in the short term, two apparently contradictory things can be true, but longer term, I'm not so sure."
Don't cry for me, Mr Greenspan - Argentine Style US Collapse? - McWilliams, Sunday Business Post

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

Key economic reports in the week ahead

On Tuesday, the April existing home sales report is expected to have shown a rise to a 6.90 million unit annual rate from a 6.89 million unit annual rate in March, according to a consensus of economists surveyed by Briefing.com.

New home sales, due Wednesday, are expected to have fallen to a 1.345 million unit annual rate, down from a 1.431 million unit rate in March.

April durable goods orders, due Wednesday, likely rose 1.1 percent, according to forecasts, after falling 2.3 percent in March.

The revised read on first-quarter gross domestic product growth is expected to show an upward revision to a 3.7 percent annual rate, when it's reported Thursday, up from the early read of 3.1 percent.

April personal income and spending figures are due Friday. Income likely rose 0.6 percent in the month, after rising 0.5 percent in March. Spending likely rose 0.8 percent after rising 0.6 percent in March. The core PCE index, the spending report's main inflation gauge, is expected to hold steady after rising 0.3 percent in March.

Also due Friday: the revised may read on consumer sentiment from the University of Michigan. The index is expected to be revised up to 86.0 from 85.3 in April. (CNN Money)