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“Dow 14,000?”
The headline on Barron’s this week follows on from the financial newspaper’s prescient prediction that the Dow would hit 13,000, and suggests that the bulls on Wall Street are still hopeful about corporate prospects.
But as stock markets across the globe head ever higher, so the signs for the global economy worsen. Last week, US GDP growth was far lower than expected for the first quarter, coming in at just 1.3%, the weakest in four years, compared to the 1.7% forecast by analysts.
But never mind – if things get too tough, the Federal Reserve will just slash interest rates. Won’t it?
Everyone is relying on the Federal Reserve to come to the rescue and slash interest rates if the US economy does indeed look as if it’s heading into recession.
But this won’t be easy. The dollar set a fresh all-time low against the euro just last week, falling to $1.37 against the European currency. Bear in mind, this is at a time when it looks like the eurozone’s commitment to a single currency is heading for its first real test – the public in both Spain (where house price growth is slowing) and Ireland (where house prices are now actually falling) are about to find out the downside of living in countries which are unable to set their own interest rates – so for the markets to be putting more faith in Frankenstein money than the world’s reserve currency says something disturbing about the dollar.
If US interest rates fall, so too will the dollar – and that means more inflationary pressure, as the falling greenback makes imports more expensive.
But it’s not just about the dollar. On top of that, the cost of living is rising. As we’ve mentioned before, the next big inflation threat – the ’new oil’, if you like – is going to be rising food costs. Bedlam Asset Management has just put out an excellent report on this.
The group points out that in real terms, the price of food has fallen by 80% over the last 30 years. But “it must be expected that basic food prices must double in the next five to ten years” which would only take them back to “half their historic average”.
There are several trends driving this – America’s wasteful use of food (corn) to produce ineffectual biofuels such as ethanol, rather than importing the far more efficient sugar-based variety from Brazil; the fact that the world’s population is becoming larger and wealthier, and thus demanding more from their meals; and changing weather patterns.
None of these problems are insoluble, says Bedlam – but it will take a “surprise crisis” as they put it, for action to be taken. And “in the meantime, investors should expect much higher food prices and shortages, for these structural imbalances are a new long-term trend.”
So the Fed is still caught between a rock and a hard place on interest rates, and Ben Bernanke knows it, which is why he keeps treading a tightrope whereby he constantly leans against market expectations; highlighting inflationary pressures when Wall Street is positive a rate cut is just around the corner.
As MoneyWeek regular James Ferguson recently wrote in his Model Investor service: “Every US macro economist out there is adjusting their economic models from slowdown to recession – or at the very least a near-miss.”
Bernanke knows tough times are coming – he’s just hoping to ease us into them, rather than precipitating a full-scale panic.
Turning to the stock markets…
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London stocks ended yesterday in the red as the banking and construction sectors weighed. The blue-chip FTSE 100 lost 29 points to close at 6,419 and the broader indices were also lower. However, investors snapped up media stocks including Pearson and Reuters following news reports that News Corp is making a bid for Dow Jones. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 closed 29 points higher, at 5,960, and the Frankfurt DAX-30 added 30 points to close at 7,408.
Across the Atlantic, the Dow Jones hit a fresh high and the other major indices also closed higher as investors were cheered by an oil price slump and stronger-than-expected manufacturing data. The Dow Jones added 73 points to close at 13,136. The tech-rich Nasdaq was 6 points higher at 2,531. And the broader S&P 500 closed up 4 points at 1,486.
In Asia, the Nikkei was boosted by the weaker yen and added 119 points to close at 17,394 today.
Following yesterday’s slump, Crude oil had risen slightly to $64.55 this morning and Brent spot was at $66.52 in London.
Spot gold hit an intra-day high of $675 today but had since fallen back to $673.70 whilst silver had risen to $13.48.
In the foreign exchange markets, the pound was at 1.9941 against the dollar and 1.4683 against the euro this morning. Meanwhile, the dollar was at 0.736 against the euro and 119.92 against the Japanese yen.
And in London this morning, Rupert Murdoch’s BSky B reported better-than-expected third-quarter profit as the company’s broadband subscribers doubled. Net income fell 6% to £142m, beating analysts’ estimates of £132m. BSkyB’s shares had risen by as much as 4.9% in early trading, their biggest rise in almost four years.
And our two recommended articles for today…
Eleven ways to cash in on carbon-free energy
– The nuclear power industry is winning the PR war and new nuclear power stations are being planned in the UK and elsewhere for the first time in years. Yet a shortage of uranium will see the metal’s price soar – which is good news for the companies that mine it. For eleven uranium stocks and funds that will give you the opportunity to cash in on the carbon-free energy trend, click here: Eleven ways to cash in on carbon-free energy
When will this credit bubble burst?
– New global money flows are creating the first truly global bubble, say the Onassis team. And whilst the stock market is still looking happy, in many places property is looking distinctly vulnerable. To find out what messages the markets are currently sending us, see: When will this credit bubble burst?