Calm before the storm, yet again?
Posted on 25 September 2008 with no comments from readers
With the fate of the $700 billion American bail-out plan in the balance the markets have gone rather quiet awaiting the outcome. That has not stopped shares in the Gulf States giving up all their gains from last Sunday, and with the Eid holiday next week we will have to wait another week to hear the reaction to the bail-out plan.
It might not be a bad thing for I think we could have a very rough week in global capital markets next week. Some reckon the dollar may rally on the plan, others see a slump if the plan includes a rate cut, which it might.
Then again Wall Street looks a bit high given that a long and deep recession is on the cards, according to no lesser analyst than President George W. Bush speaking last night. You might consider the Dow Jones Index should be closer to its 2003 low of 7,000 than well above 10,000 points.
Yields on Treasury bonds have been squeezed so low that you have to wonder why investors choose to own this paper, and they will also question their sanity if the bond market tanks. Inter-bank interest rates are much higher which has to be a danger signal for bonds.
Gold and silver are holding the massive gains of last week and also looking for a pointer to higher levels. It will be interesting to see the market reaction if some sort of bail-out plan is passed by Congress: will there be a relief rally, and if so for how long until reality begins to dawn?
The reality surely is that while what Congress is deciding is important, it is not going to restore the health of the US economy instantly and a long and painful road lies ahead. This path almost certainly includes higher levels of inflation and further dollar devaluation in a repeat of the pattern of stagflation that we last saw in the 70s bail-out from the 1974 market crash.
In this climate the assets to hold are commodities in general, and precious metals in particular. Gold managed an eight-fold increase in the late 70s while silver soared even higher. Do not be surprised if history repeats itself, and oil prices also stay high.
Incidentally that would be good for the Gulf stock markets and real estate in the GCC markets, although not a protection against some consolidation and correction in both asset classes.
