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Investors might well be glad to see the back of what has been a hectic week on the markets.
Even former Fed chief, ‘maestro’ Alan Greenspan, hilariously, is now throwing his lot in whole-heartedly with the bears. Speaking to a Futures Industry Association meeting in Florida yesterday, he said of the housing market: ‘If prices go down, we will have problems – problems in the sense of spillover to other areas.’ And given that prices are indeed, already going down, will we see such a spillover, oh Maestro? ‘I expect to.’
Don’t pinch yourself – you’re not dreaming. This is indeed the same man who as recently as 2005 was praising sub-prime lenders, for ‘safely’ extending access to credit to people once excluded from the housing market. This is the same man who slashed US interest rates at every excuse, thus being largely responsible for the catastrophic lack of risk awareness in global stock markets.
In fact, if Mr Greenspan was still in charge he’d probably be plotting his next rate cut right now, rather than causing PR trouble for his hapless successor, Ben Bernanke. But will Mr Bernanke continue to follow Mr Greenspan’s recipe for success? It may be harder than he thinks…
Alan Greenspan’s current bearish outlook on the US economy is rather amusing to those – like ourselves – who have consistently criticised his policies while he was playing with the monetary levers of the world’s largest economy.
We’re far from being the only ones – one Charles White from ThomasLloyd Asset Management in New York tells Bloomberg of Mr Greenspan: ‘This is a guy who presided over a bubble in the equity markets. He was the provider of liquidity to the financial markets, and he took the risk out of people doing these trades.’
But unfortunately, it looks as if Greenspan’s one trick of cutting interest rates every time it looked like trouble was on the horizon may not be open to his successor.
Last month, US producer prices – the price of goods at the manufacturing stage, basically – jumped by 1.3%, far in advance of the 0.6% expected. Costs were higher across the board.
And even as inflation was rising, there was more evidence of the economy slowing – manufacturing growth in both the New York and Philadelphia regions slowed to a near standstill.
As Neal Ryan of Blanchard told Marketwatch: ‘Can the Fed continue to walk down the middle of the road on the growth or inflation equation without being hit by trucks traveling in both directions?’
We doubt it. Higher rates will make the housing market even worse, and lower rates will hammer the dollar and send inflation higher. Mr Bernanke is likely to get squashed whichever way he turns – and in the meanwhile, Mr Greenspan will simply tut and say ‘I told you so.’
And it seems inflation’s not just a problem in the US.
Wage deals here in the UK increased at their fastest pace in eight years in the three months through February, according to Industrial Relations Services (IRS), which covers about 60% of pay deals in the period, says Bloomberg. The median average wage rise came in at 3.5%.
‘Pay awards in the private sector remain high, with the hike in headline inflation at the end of last year continuing to feed through to 2007 pay deals,’ said IRS’s Sarah Welfare.
Meanwhile, the Bank of England reported yesterday that inflation expectations among the general public remain high, at 2.7%, also an eight-year high.
The UK isn’t yet seeing the kinds of problems the US is having, but there’s no way it can remain immune to a US slowdown. And that means it’s time to think about investing more defensively.
Tim Price discusses Greenspan’s toxic legacy and the likely fall-out from the US sub-prime market – and what you should do about it – in more detail in this week’s MoneyWeek, out today. (If you’re not yet a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.
Turning to the stock markets…
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Yesterday was a good one for UK stocks: the FTSE 100 index of leading shares closed 132 points higher at 6,133 with all listed companies posting gains. Imperial Tobacco made the biggest advances of the day, its share price rising over 8% as it ended months of speculation by launching a bid for Franco-Spanish firm Altadis. For a full market report, see: London market close.
Across the Channel, the Paris CAC-40 ended the day 93 points higher, at 5,389. In Frankfurt, the DAX-30 was 137 points higher, at 6,585.
On Wall Street, stocks closed higher as investors paid little heed to economic data pointing to rising inflation and slowing growth. The Dow Jones ended the day at 12,159, a 26-point gain. The Nasdaq gained 7 points to end the day at 2,378. The S&P 500, meanwhile, closed 5 points higher at 1,392.
In Asia, concerns over the US economy saw Japanese investors take profits ahead of the weekend. The Nikkei closed 116 points lower, at 16,744. In Hong Kong, the Hang Seng ended the session at 18,953, a 15-point drop.
Crude oil was 15c lower at $57.40 this morning, whilst Brent spot was little-changed at $60.56.
Spot gold was steady at $646.30 today and silver was last quoted at $12.98.
And in London this morning, the UK’s second-largest department store, Debenhams, announced a 4.5% drop in sales over the past half-year. The chain is losing out as rivals Marks & Spencer and John Lewis increase their market share. However, CEO Rob Templeman said that the company was encouraged by a ‘strong customer reaction’ to new spring lines.
And our two recommended articles for today…
A lesson for US mortgage lenders
– US foreclosures rose 42% in 2006 and – bearing in mind the lessons of the last UK house price crash – it could put further downward pressure on house prices. For Adrian Ash’s view on whether the US mortgage industry will act to contain a subprime mortgage collapse, read: A lesson for US mortgage lenders
Can China go green?
– The Chinese government knows it must take prompt action to avoid environmental catastrophe. That needn’t threaten China’s remarkable economic development though, says Stephen Roach. In fact, greening the economy could help in its necessary rebalancing. To find how he thinks China can best tackle its environmental and economic troubles, see: A lesson for US mortgage lenders