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I have to confess, I’ve not been paying that much attention to the US election race.
It seems to have been going on forever, for one thing. And to an outsider, the political distance between the two tribes seems almost as slim as the gap between our own main parties here in the UK.
But I had to chuckle when I read about Republican candidate Mitt Romney vowing that he wouldn’t let America become a ‘second-tier’ nation like Britain and other European countries.
You should aim so high, Mitt. Because apparently the country that smart New Yorkers are now comparing America to the most, is Argentina…
In a report on the dollar yesterday, Charles Dumas of Lombard Street Research said that on a recent trip to New York, he “repeatedly” heard, to his surprise, the assertion that “America is the new Argentina.”
The pundits in question are referring to Argentina’s currency collapse and debt default in 2001/2. It may once have seem far-fetched to suggest that America could go the same way, but if I were a bookie, I’d be cutting the odds from “Elvis found on the moon” levels to nearer to “Scotland reaching a World Cup semi-final” – unlikely and unprecedented, but not impossible.
After all, the pound hit a 26-year high against the US currency yesterday, heading to well above $2.06. It was partly driven by an interview with the Bank of England’s Kate Barker, who seems sceptical of a need for any interest rate cuts in the UK. It’s also because the US Federal Reserve is expected to cut interest rates later today when it meets for its regular rate-setting discussion.
This expectation has been compounded by yet more dreadful figures from the US housing market. The S&P / Shiller house price index showed that prices fell at an annual rate of 4.4% in 20 major cities in August. That’s the eighth monthly fall in a row, and the biggest fall since the series began in 2001. Prices in Tampa in Florida – one of the biggest boom areas – were down by more than 10%.
Meanwhile, consumer confidence slid to its lowest since October 2005 – that was just after Hurricane Katrina hit.
So you’d think that the evidence all points to a cut. And undoubtedly, in his heart, Ben Bernanke is an interest-rate cutter. He’d happily slash them all the way to zero tomorrow if he felt he could get away with it.
But he can’t. The dollar’s decline at the moment is still being described as ‘orderly’ by most pundits. There’s still hope that the US currency will weaken at just the right rate to cut the nation’s current account deficit. The dream is that US exporters will take over as the primary economic driving force from the consumer.
I have to say I’m sceptical on this – but that’s a topic for another day. The point is, the dollar is on very shaky ground. If the decline turns into a rout – which could well happen if interest rate cuts are sharper than expected – then that would drive up prices of imports, making life harder for US consumers. And that would be very counter-productive, given that the point of rate cuts is to stave off recession.
Consumer goods giant Procter & Gamble (PG) has already warned that its profit margins are being squeezed by rising energy and raw material costs. The chances are that some of this will start to make its way through to consumers if inflation persists. After all, P&G isn’t a luxury goods company – it specializes in staple goods, which consumers are unlikely to cut back on. And its rivals must be suffering the same pressures, so if they all decide to raise prices at once, consumers won’t have much choice but to pay.
If inflation does “start to impose on US consumers a major hike in key living expenses, the economic downswing may prove much longer and nastier than if the Fed took care of the currency for a change,” says Dumas. He argues that the most the Fed can justify is a quarter point cut in the discount rate, which is the rate that it allows banks to borrow at.
That’s not to say that Bernanke will take that option. He may feel he can get away with a quarter point base rate cut, which is about the only thing that will keep stock markets happy. But if he does so, the dollar’s continued decline is guaranteed – and if he’s not careful, it could get a lot faster.
That’s why we’re still backing gold as a great investment, despite its recent strong run. But if you’re worried that you’ve missed out on the best of the gains for now, then you shouldn’t miss this week’s MoneyWeek cover story. Dominic Frisby – a new MoneyWeek writer from whom you’ll be hearing a lot more in the near future – picks out eleven of the best junior gold and silver miners to buy just now.
If you’re not already a subscriber, then why not sign up for a three-week free trial.
Turning to the wider markets…
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In London, commodities stocks led the FTSE 100 into the red yesterday. The index fell 47 points to end the day at 6,659 as the likes of Vedanta and Antofagasta tumbled on lower metals prices and profit-taking from Monday’s M&A-related gains. For a full market report, see: London market close
Elsewhere in Europe, the Paris CAC-40 fell 32 points to end the day at 5,803. And in Frankfurt, the DAX-30 was off 31 points, at 7,977.
On Wall Street, Procter and Gamble led the Dow Jones 77 points lower to a close of 13,792. The S&P 500 was also lower, down 9 points to 1,531. However, good news from Apple saw the tech-heavy Nasdaq pull back most of its earlier losses to end the day just a fraction of a point lower, at 2,816.
In Asia, the Japanese Nikkei had risen 86 points to 16,737 today. However, in Hong Kong the Hang Seng had fallen 285 points to 31,352 as investors remained cautious ahead of the US interest rate decision to be announced later today.
After sliding $3 in New York yesterday, crude oil had fallen further to $89.62 this morning. And in London, Brent spot was over 1% lower, at $86.58.
The falling dollar saw spot gold rise to $783.40 today, whilst silver was unchanged at $14.18.
In the currency markets, sterling hit a 26-year high against the dollar this morning and was last trading at 2.0725. The pound was also at 1.4347 against the euro. And the dollar was at 0.6920 against the euro and 115.14 against the Japanese yen.
And in London this morning, sugar and sweetener maker Tate & Lyle announced a 56% drop in first-half profit due to sugar trading losses, tax increases and the weaker dollar. Tate & Lyle shares had risen by as much as 2.3% in early trade.
Finally, our recommended articles for today…
$100 oil, interest rates and your gas bill
– The oil price edged perilously close to the $100 mark this week, says Jeremy Batstone Carr. He looks at the near-term outlook for oil and how the higher price will feed into inflation – and affect UK monetary policy – here: $100 oil, interest rates and your gas bill
Is Facebook really worth $15bn?
– Microsoft has just paid $240m for a 1.6% stake in social networking site, Facebook. Eight years on from the tech bubble, Merryn Somerset Webb thinks markets are being taken in by a good story once again. For more on why Facebook is looking overpriced and overhyped, read: Is Facebook really worth $15bn?