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It’s our last day here in the States – we’re back in the UK tomorrow. It’s been an interesting time to be here.
Alan Greenspan passed the Federal Reserve buck to Ben Bernanke, Google shares dived – more on that in market news below – and George Bush gave his State of the Union address.
The State of the Union address is a bit like the Queen’s Speech in the UK. It’s where the President outlines where he thinks the country is going, and highlights the legislative plans he has for the year ahead.
And judging by what we’ve seen while we’ve been here, the union is certainly in a state…
America basically has all the same problems the UK is suffering at the moment. But as with most things American, they are bigger. What is unusual is that, for once, we’re ahead of the US in terms of how things are unfolding. But they’re catching up.
USA Today puts it rather succinctly when it sums up the problems facing Ben Bernanke as he takes over at the Federal Reserve.
“The record housing market is losing steam, energy prices remain high, and the nation is saddled with huge trade and budget deficits.” With a complete absence of irony, the paper adds: “Turbulence is possible.”
Try inevitable. When you turn on the TV here, almost every second advert is from a loan company, telling you how easy it is to borrow money against your house. But if your house isn’t increasing in value anymore, it’s going to become a lot harder to do that. You can read more about why US house prices look like they have peaked in our recommended article near the bottom of this email.
The problem is that the ‘house as cash machine’ phenomenon is the only thing that’s been keeping middle class American families’ heads above water. One of the big issues that keeps cropping up in the news here is the fact that it now takes an upper class income to live a middle class lifestyle.
Contrary to popular opinion, US consumers’ massive debts are not just down to a fondness for flat-screen TVs and monster trucks. The fact is that many families are finding that they need two incomes just to get by. Interest rates might only be at 4.5%, but that’s over four times higher than they were less than two years ago. That means higher mortgage bills.
It’s not the only living cost that’s rising. Medical insurance, childcare costs, college fees – it’s little wonder that US bankruptcies are at record levels. Just like in the UK.
And then of course, there are energy prices. In the State of the Union address, Mr Bush said: “ America is addicted to oil, which is often imported from unstable parts of the world.” He is of course, stating the blindingly obvious. But what’s less obvious is what anyone can do about it.
This has so far been a surprisingly mild US winter. Here in Baltimore, January has just passed by without any snow falling at all, for the first time in 33 years. And yet, oil prices are still close to record levels.
And people are clearly very worried about their bills. A columnist in the Baltimore Sun describes the warm January as “money in the bank.” But he also points out that even though the typical Baltimore resident used 20% less gas last month than in January 2004, higher prices meant the average heating bill jumped 15% from $165 to $190.
What does all of this mean? In the UK, when faced with flat house prices, rising living costs, and massive heating and fuel bills, consumers cut back sharply on their spending. That’s not fun for the UK economy, but on a global scale, it doesn’t have that much impact.
But if the US consumer stops spending, that’s a whole new problem. Their consumption supports 20% of the global economy – so if they slow down, so does the rest of the world.
Subscribers can read more about why the fall of the US consumer is one of the big risks facing the global economy this year on our website here: Seven key risks facing the global economy in 2006
And 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 3-week FREE trial of MoneyWeek
Turning to stock market news – which is a little shorter than usual today due to the timing of our flights back into the UK…
The FTSE 100 ended at a four-and-a-half-year high, up 41 points at 5,801. The banking sector was among the main gainers as rumours of an imminent bid for Lloyds TSB swept the stock market. Lloyds closed 5% higher at 535p. For a full market report, see: London market close.
Over in continental Europe, the Paris Cac 40 closed up 51 points at 4,999 while the German Dax jumped 52 to close at 5,726.
Across the Atlantic, US markets were mixed in mid-session trading. Strong results for Boeing helped keep the Dow Jones above 10,900 points. But the tech-heavy Nasdaq was in the red, after internet giant Google saw its shares fall by as much as 11% as fourth quarter earnings missed analysts’ expectations. That’s despite an 82% jump year-on-year in net profit.
So does this mean that investors are finally coming to their senses on Google? Not a bit of it – plenty of analysts were urging their clients to ‘buy on weakness.’ But even at a stock price of around $390, Google still has a current p/e ratio of nearly 90 times. Needless to say, we don’t think the shares can be described as a buying opportunity yet.
In US trading hours, oil was sharply higher, at around $68.70 a barrel in New York, while Brent crude was trading at just below $66. Meanwhile, spot gold was trading at around $567 an ounce.
And our two recommended articles for today…
Is the US property bubble about to burst?
– The global economy depends on US consumer spending – which in turn depends on the US housing market continuing to boom. So recent news suggests we should all be very worried indeed, say John Robson and Andrew Selsby of RH Asset Management. To find out why the US housing market is looking distinctly shaky, click here: Is the US property bubble about to burst?
What do politicians and psychics have in common?
– Psychics are frauds – it’s as simple as that, says Vedran Vuk of the Ludwig von Mises Institute. If they could really predict the future, then market forces mean they would be paid highly to act as consultants and advisors to companies and governments. The same goes for faith healers, fortune tellers – and for politicians. To find out why, click here: What do politicians and psychics have in common?