Every morning, at seven o’clock, I make myself a cup of tea and settle down in front of my PC to read all of the morning’s stock exchange announcements. This used to be a happy half hour.

I would read of all the progress being made by the UK’s many quoted companies. I would count up those increased dividends. I would purr at higher profits. I would digest the many confident statements of chairmen and chief executives.

It was the intellectual equivalent of three Weetabix, and sent me on my daily rounds with a sense of optimism, happy that the good ship of commerce was chugging its way purposefully through calm seas with my life savings on board.

Now though things are different.

I turn on the PC with a sense of foreboding. I put an extra lump of sugar in my tea to anaesthetize the pain of profit warnings and dividend cuts. And I watch my fortunes sink.

Yesterday though was different. I was prepared for the worst. A week-end spent reading about the wrecks of Fannie Mae (FNM) and Freddie Mac (FRE), of the collapsing housing market, of mounting job losses and credit card debts had steeled me for a miserable morning.

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Take Hamworthy (LON:HMY), for instance.

This has been one of the stars of the small cap sector over the last few years, growing its profits at an annual rate of 27%. It has a bright future too, thanks to its expertise in the pumps and systems that handle gas and water on board ships.

Over three quarters of its sales are related to the production and transportation of oil and gas, and it is the latter that really underpins its prospects. The volume of LNG carried by sea is expected to rise by 10% per year until 2015. So no wonder Hamworthy’s chairman reported strong order books and ‘robust long-term growth prospects’ at yesterday’s AGM.

And another…

‘Our core business continues to prosper’ was the phrase used by another chairman, this time David Evans of Immunodiagnostic Systems (IDH), as he reported a 23% rise in earnings per share and a 20% hike in the annual dividend.

Since starting out as a distributor of diagnostic products thirty years ago IDH is now a leader in the global In-Vitro Diagnostics industry.

It exports 70% of its products, which are medical diagnostic kits. It has particular expertise in the areas of calcium dysfunction and bone diseases, such as osteoporosis, osteomalacia and Paget’s disease, but its flagship is its kits for the determination of Vitamin D in human serum.

Vitamin D is an important marker in the control and regulation of the body’s calcium reserves and is increasingly being accepted as necessary for the prevention of diseases including breast cancer, prostate cancer, colon cancer, diabetes and heart disease.

Since coming onto AIM in 2004 IDS has grown in exemplary fashion both organically and through acquisition and analysts are forecasting a big jump in earnings this year.

And here’s another…

And the third company to raise my spirits and demonstrate that not everything in the garden is withering away is SDL.

Its shares jumped after Chairman and Chief Executive Mark Lancaster told the market that results for latest six months ‘will be significantly ahead of market expectations’.

Revenues in this period were 37% higher than in 2007, with two thirds of this related to organic growth. So here is a third company that the recession is by-passing, evidence that if the product is good enough it will always succeed.

SDL’s product answers the commercial imperative that multinational organizations must deliver consistent information around the world in a variety of languages. 90% of information that is produced by a global organization is relevant to an international audience and yet, according to SDL, only 10% is delivered in their language.

SDL provides the software and services that can tackle this problem, central to which is software that can automatically translate from one language to another.

The shares of each of these three companies rose yesterday.

Each is a specialist with a worldwide reputation for excellence. In their rush to abandon the stock market, investors must take care not to throw the baby out with the bathwater. These three beautiful babies should each grow into handsome adults in the years ahead.
Regards,

Tom Bulford
for The Penny Sleuth

PS. One little-known, London-listed “killer driller” holds exclusive rights to extract a potential 10 billion barrels of oil from underneath this UK-owned territory. Find out more on this exciting penny share story here…

PPS: Know someone else who would be interested in getting the latest information from the exciting world of small caps each day? Then send this link to them now…

“The recent inflation dynamic is worrying,” Banco de Mexico’s five-member board said in a statement. “The balance of risks for inflation has worsened.”

Consumer prices in Mexico jumped nearly 5% in May from a year earlier, the biggest jump since 2004, according to Bloomberg News. The government has issued a price freeze on tortillas, cooking oils, beans and roughly 150 other items this year to ensure its population is adequately fed.

The decision surprised many analysts as it flouted the country’s president, Felipe Calderon, who has hinted that borrowing costs are already too high. Still, inflation demanded Mexico’s attention as soaring food and energy costs have resulted in what has fast become a worldwide inflation epidemic.

Soaring fuel prices pushed India’s inflation rate to a 13-year high in early June, adding to speculation the central bank may accelerate its own monetary tightenting initiative, Financial Times reported. Inflation reached 11.05% in the 12 months ended June 7, up from 8.75% the previous week, and well above the 9.82% median forecast in a Reuters poll of analysts, the paper reported on its Web site.

Earlier this month, the Reserve Bank of India announced a surprise rate increase of its own, pushing its key lending rate up 25 basis points to a full 8%. The bank also raised its cash reserve ratio – the amount of cash banks must keep on hand – by 25 basis points to 8.25% as recently as April 29.

In China, consumer prices rose 7.7% in May after inflation reached a 12-year high of 8.7% in February. China’s producer price index rose 8.2% in May, the highest in more than three years.

The problem isn’t any better in mature markets either. Eurozone inflation hit a 16-year high in May, as costs pushed inflation up 0.6% to an annualized rate of 3.7%. High commodity costs fueled the increase, as food costs jumped 6.4% in May up from 6% in April. Energy prices soared 13.7% year-over-year on the back of record high oil, up from a 10.8% increase the month prior.

In the United States, the producer price index (PPI) jumped 1.4% in May, the largest increase since November. Over the last 12 months, producer prices have increased 7.2% compared to the 6.5% increase in April.

“Just about everywhere prices are rising and they are doing so at a strong pace,” said Joel Naroff, president and chief economist at Naroff Economic Advisors. “While the pathway from intermediate and crude goods price increases to consumer prices is quite unclear, it is never good news to see the extensive nature of price increases that were contained in this report.”

After nine months of cutting interest rates and lending freely to financial firms hoping to ease the credit crunch pain, U.S. Federal Reserve Chairman Ben S. Bernanke is signaling a new willingness to reverse course and battle inflation.

“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,” Bernanke said earlier this week. “The Federal Open Market Committee (FOMC) will strongly resist an erosion of longer-term inflation expectations.”

The FOMC is scheduled to meet June 24 and 25. It is widely expected that it will vote to hold rates steady.

Source: Mexico Joins the Global Battle Against Inflation with Surprise Rate Cut

The investment, which will be made through the group’s Sumitomo Mitsui Banking Corp. unit, underscores an evolving trend among large Japanese banks that have so far been unaffected by the subprime collapse.

Sumitomo Mitsui, Japan’s second largest bank, has not confirmed the agreement, but its 100 billion yen investment will secure an approximate 2.3% stake in Barclays. Barclays was racked by the housing collapse that started last year and has since dragged the U.S. economy to near recession. Barclays’ stock dropped 40% so far this year, as the bank took $3.35 billion in write-downs.

Last week, Barclays said it would seek out $7.8 billion in fresh capital from sovereign wealth funds, in a fresh share offering. Singapore’s Temasek Holdings, China Development Bank, and the Qatar Investment Authority are among the sovereign wealth funds reported to be interested in Barclays.

“This fixes the problem quite neatly for them,” Mike Trippitt, a banking analyst at Oriel Securities told The Independent. “They are signalling that at the moment there don’t seem to be any further writedowns. If you have got sovereign wealth funds buying in with a medium-term view you might argue that it signals some visibility.”

Barclay’s ratio of Tier 1 capital, a measure of financial strength, was at 5.1% at the end of 2007. Raising $8 billion would lift it to nearly 6%, analysts said.

Banks and securities firms have raised about $303 billion in the past year after almost $400 billion of write-downs and credit losses caused by the collapse of the U.S. subprime mortgage market, according to Bloomberg data.

Sumitomo Mitsui would be the second major Japanese bank to participate in the rescue effort of a Western financial institution struggling to emerge from the subprime crisis.

“This indicates that Japanese banks are in a safer position than their global peers and have surplus capital to invest,” Masafumi Oshiden, a Tokyo-based fund manager at BlackRock Inc. (BLK), told Bloomberg. “It’s a good move for them and I’d like to see them being even more aggressive.”

In January, Mizuho Financial Group pumped $1.2 billion into Merrill Lynch & Co. Inc. (MER) through the purchase of preferred shares. And many analysts believe there is more investment to come as Japanese banks, which find themselves in a relatively strong position, become more assertive with their overseas acquisitions.

“Under these circumstances I think that Japanese financial institutions are in a position to take an aggressive attitude… it is a change that should be very much welcomed,” Yoshimi Watanabe, Japan’s financial services minister, told the Times Online.

Source: Barclays Gets a $927 Million Jump Start as Japanese Banks Ramp up Overseas Investment

RBS analysts have warned clients to brace for a full-blown crash in the global stock-and-bond markets over the next three months as the conflicting realities of slowing growth and rising inflation paralyze the world’s major central banks – causing “all the chickens [to] come home to roost,” Great Britain’s Daily Telegraph newspaper reported.

The report, which first surfaced late Wednesday, raced across the Internet yesterday (Thursday), though it appears that European news organizations are giving it much wider play than their U.S. counterparts.

The predicted swoon would cause the U.S. Standard & Poor’s 500 Index – already down 15% from its trading high of 1,576.09 reached Oct. 11 – to nosedive all the way down to 1,050 by September. For the closely watched, broad-based U.S. stock index, that would represent an additional decline of 22% from yesterday’s close of 1,342.83 – and a total decline of 33% from its Oct. 11 apex.

This is the worst forecast of any investment bank survey followed by Bloomberg News.

“The Europeans, in general, tend to have much-more conservative banking systems and financial vehicles than we have here in the United States,” said Keith Fitz-Gerald, investment director for Money Morning. “They’ve been through centuries of economic and financial conflict. For that reason, they are much more pre-conditioned and predisposed to listen to major warnings like this one.”

The sell-off that RBS expects to deepen started last fall after the U.S. subprime-mortgage crisis turned into a full-blown credit debacle even as it took on a worldwide reach. Banks and brokerages have written off roughly $400 billion in assets. But that torrent of write-downs may get even worse: At a conference in Monaco yesterday, New York hedge fund manager John Paulson estimated that this amount will triple to $1.3 trillion – a reality that will clearly exacerbate the decline of the financial markets worldwide, Bloomberg reported.

The predicted “contagion” will spread across Europe and will afflict the emerging markets, including the fast-growing economies in Asia, the RBS research team wrote to clients in a June 11 report. RBS is Britain’s second-largest bank.

A sell-off of that breadth and magnitude would represent one of the worst bear markets the world has seen over the last century, and would clearly have implications reaching beyond stock-and-bond prices.

“A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, 42, a U.K-based credit strategist for RBS.

In the credit markets, high-grade corporate bonds would see their trading values soar, while their lower-grade counterparts would see their own values plunge, thanks to a “renewed bout of panic on the [global] debt markets,” the Daily Telegraph reported, citing key excerpts of the internal RBS report.

Addressing the fallout that RBS expects to see in the bond markets, Janjuah wrote to clients that he couldn’t “be much blunter. If you have to be in credit, focus on quality, short durations [and] non-cyclical defensive names.”

The credit analyst – who became an industry star after his grim warnings about the current global credit crisis played out as he predicted – also counseled clients that “cash is the key safe haven. This is about not losing your money, and not losing your job.”

RBS expects the U.S. stock market to rally into the early part of July, thanks chiefly to the boosts provided by the aggressive rate-cutting campaign that the U.S. Federal Reserve launched last September and from the tax-rebate checks that were initiated by the Bush Administration’s economic-stimulus plan. Those benefits will soon sputter and the real damage from soaring food-and-energy prices will finally become apparent.

Unfortunately, the world’s leading central banks may not be in the position to help out this time around. In fact, both the Fed and the European Central Bank (ECB) face a so-called “Hobson’s choice” as workers start losing their jobs en masse and lenders continue to cut off credit, the Daily Telegraph said.

Usually, the central banks would just cut interest rates or employ some other form of monetary stimulus to help their economies regain positive momentum. That’s not an option this time around: The soaring food-and-energy prices are already pushing inflationary pressures to levels that will destabilize stock-and-bond markets.

The bottom line is that the U.S. economy could end up with stagflation, the rare but hard-to-eradicate one-two punch of high unemployment and high inflation.

“The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation,” Janjuah said. “The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets.”

And Europe won’t dodge the bullet, RBS debt-markets chief Kit Jukes said.

“Economic weakness is spreading and the latest data on consumer demand and confidence are dire,” Jukes told the newspaper. “The ECB is hell-bent on raising rates. The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB.”

”What is being discussed here is absolutely within the realm of possibility and is a possibility that we’ve been discussing here in Money Morning for quite some time, now,” Fitz-Gerald, the Money Morning investment director, said in the interview yesterday. “And we’ve never wavered in that conviction. In situations like this one, the best offense is a good defense, which consists of an appropriately structured and diversified portfolio of holdings that emphasize stability and balance, and current income derived from global markets. That kind of portfolio may well weather this kind of storm much better than a U.S.-based portfolio in isolation.

“This report – and others like it – may be extremely unsettling to individual investors. But the historical record is unequivocally clear that the best profit opportunities come when everyone thinks the skies are darkest. Savvy investors at this point in time can take steps to help them avoid this even if the rest of the world sinks into an economic cataclysm.”

Source: Financial Fears Sweep the Globe After RBS Predicts Worldwide Stock Market Crash

Inflation is up significantly from the 1.7% increase reported in April, Statistics Canada reported yesterday (Thursday). And high gas prices are to blame as fuel costs rose 15.0% in May compared with the same month last year – that’s considerably faster than the 12-month change of 11.6% posted in April.

Excluding gasoline prices, 12-month inflation grew 1.6% in May.

Last week, the central bank voted to keep its overnight interest rate at 3%, warning that inflation risks have “shifted slightly to the upside.” But the bank quickly followed that up by saying global demand for Canadian goods and services remains strong despite a U.S. slowdown.

“This report will not push the bank to raise rates in 2008, but we do see 100 basis points of hikes coming in 2009 as Canada’s inflation problem heats up,” Meny Grauman, an economist with CIBC World Markets Inc. in Toronto, said in a note to clients, Bloomberg News reported.

With an end to the rate cuts, the Canadian dollar is on the rise. The loonie has gained 1% since the June 10 decision to hold rates steady, Bloomberg reported.

Recession Protection?

Earlier this month, Canada announced its gross domestic product (GDP) shrank 0.1% in the first quarter, marking the country’s first decline since the second quarter of 2003.

But this is where inflation could actually be a friend.

In today’s world, where interest rates are low and commodity prices are high, Canada’s in a very strong position for two reasons:

• It has oil reserves – somewhat larger than the Middle East – in the form of the Athabasca oil sands.

• And it’s the world’s largest producer of uranium, with 25% of the world market. (Australia is a close second, with about 23%.)

Since Canada is a chief oil exporter, its oil companies are on the receiving end of soaring prices. And in turn, that helps pad the economy’s pocket, becoming an unlikely protective barrier to another quarter of negative GDP growth.

Also working in the economy’s favor, month-to-month wholesale sales jumped 1.4% in April, more than doubling forecasts of 0.6%, Reuters reported. This suggests that domestic demand is able to wade through inflationary waters and lends credence to justifying a future interest rate hike.

The Bank of Canada’s next scheduled date for announcing the overnight rate target is July 15.

Source: Can Inflation Save Canada from Recession?

Now Vincent, 36, has just put a geothermal heat pump under his Sussex home, while Dimbleby, 37, is starting a snail farm “with limited success” from his garden in Hackney, London. “You have to clean them and put them in a net with lettuce for a month, which is difficult when someone’s just thrown some crack over your wall.”

Healthy living hasn’t always been a priority for the pair. As busy City executives, a typical lunch involved going to a vending machine and finding “the least horrible thing to eat”, says Dimbleby, whose father is broadcaster David Dimbleby. Vincent would regularly dine on bizarre pre-packaged creations, such as a “scotch-egg-type thing with sausage meat, hollowed out and stuffed with coleslaw”. It’s a diet that will have you falling asleep at your desk, he says – not to mention a recipe for a bad sex life.

But they have one thing to thank their bad lunches for: it’s where they got the idea that fast food doesn’t have to be bad food. For six months in 2003, the two began devising a menu with chef Allegra McEvedy. They had a vision of a fast-food joint where hot, healthy meals would slide down the chutes – such as Moroccan meatballs, rather than cheese­burgers.

Having worked with White & McKay owner Vivien Imerman, Vincent convinced Imerman and his brother-in-law, property magnate Robert Tchenguiz, to invest £650,000. We gave away half the equity, says Vincent – “not very good”. But it’s understandable, says Dimbleby: “we were two guys who’d never run a restaurant looking for money”.

Scouting for locations, “it was very tempting to go for a property that was ‘off pitch’ (ie, cheaper to rent). But you actually have to get a property that is right in the thick of the competition,” says Vincent. “The only way to test this model is to be next to Starbucks, Pret a Manger and McDonald’s.”

So the first Leon was opened on London’s Carnaby Street in July 2004. But early sales figures came in at just £8,000 a week – £6,000 short of breaking even. So “we got a pen and ran a line through the menu. There was just too much there” – it was confusing customers, says Dimbleby.

The cutbacks worked. Within a year, sales had picked up to £18,000 a week, and they opened a second outlet in Ludgate circus. Soon after, Leon hit the £1m annual turnover mark. Today, it has eight outlets, turning over sales of £8m and in September the pair are opening a branch in Bristol, their first outside London. This is “the first milestone” in delivering 30-35 outlets by 2010.

In an era where people are browbeaten about their lifestyles on every side, the Leon founders prefer to let their actions do the talking. “We’ve never preached,” says Vincent. “You know, you either tell people you’re funny, or you make them laugh. We want to act in a way that represents the good life, not tell them about it.”

Source: The McDonald’s Route to the Good Life

Here’s what he might write:

Dear Alistair

Hiya! It’s me! Mervyn King, Governor of the Bank of England. As you know, it’s our job to keep inflation stable – at around 2.0% as measured by the Consumer Price Index. If it goes below 1.0% or above 3.0%, I have to write you a letter explaining why.

Guess what! It’s gone above 3.0%. So this is that letter. Here goes…

There’s no easy way to say this, but I reckon it’s all your boss’s fault. As Chancellor, he presided over a massive credit binge, which is inflationary. He also allowed public spending to grow ahead of inflation. That’s inflationary too.

When we had steady growth and stable prices, he was happy to stand up and take a cheeky bow. Now we have slowing growth and rising prices. Personally I reckon you, or your boss, should be writing a letter to me, not the other way round.

But anyway, there’s your answer. We missed our target because your boss is a clown.

Cheers

Merv

PS I’ll be invoicing the Treasury for the cost of this stamp. I’m not made of money, you know!

On second thoughts, he probably won’t write that. But I bet he wants to! So… why am I certain that the Bank will miss its target? Because yesterday the results of its quarterly Inflation Attitude Survey came out.

The average Briton reckons the true inflation figure right now is 4.9%. And they reckon it’ll average 4.3% for this year. Compare these figures to February. The average respondent then thought inflation was running at 3.9% per year, and would average 3.3% in 2008.

This is a massive jump. It tells us that the Bank of England is losing the battle when it comes to influencing inflation expectations. And these expectations matter.

Inflation has a tendency to be what economists call positively autocorrelated. What this means is that high inflation in one time period tends to be followed by high inflation in a second, subsequent time period (we would call it negative autocorrelation if the opposite were true, i.e. we saw a high-low-high-low pattern).

Here’s how this works. Once inflation starts to rise, consumers notice. How can we not – we all have to buy things. And – with the exception of the terminally unobservant – we notice when the prices of things we buy go up.

And when there’s an expectation that prices will rise, there’s a very great likelihood that they will rise. The main mechanism that drives this process is wage demands. Faced with a rising cost of living, people ask their employers for more money. If employers refuse, they’re left with an unhappy and truculent workforce. Not good for businesses.

But if employers concede, their profit margins are squeezed. In order to maintain profits, they pass the cost of their increased wage bill onto the consumer, in the form of higher prices. Voilà! We have inflation.

Then, the whole dance begins again. This is the classic wage-price spiral. It is through this mechanism that higher inflation tends to beget higher inflation. We’re seeing it right now – prices rising, and consumers factoring that into their expectations.

So what can the Bank do? Simple – slam the brakes on! Confound those expectations!

The bond market has priced in three rate rises over the rest of the year. Why not just do them all at once? Send a clear message that the Bank means business. We’ll see an immediate inflow of funds into sterling, and a stronger pound will make imported commodities like food and oil less expensive for us.

Of course, a steep rate rise will play havoc with the housing market. But last I looked, that was on the critical list anyway.

However you look at it, the economy’s in a bind. We’ve had some good years. Now we’re going to have some bad. Boom and bust never went away, whatever New Labour might have told us to the contrary.

Either we raise rates, and people (especially those with loans to repay, such a mortgages) feel poorer. Or we allow inflation to keep creeping up. Faced with ever rising prices, people will feel poorer.

Some of those who feel poorer will, depending on their line of work, ask for a pay rise. Of those, a significant number will be knocked back, or offered something they deem unsatisfactory. Today sees the start of the Shell tanker drivers’ strike – a four-day bid to secure a 12.5% pay rise.

But this won’t be the last strike we see this year. Things will get really interesting when public sector unions decide to take on Brown’s weak government…

Get ready for some dramas.

How a €20 bribe unlocked Central Africa’s long-lost treasures

‘Let me tell you a story,’ writes Manraaj Singh in today’s Profit Hunter. ‘It’s about how one simple €20 investment could end-up paying back billions…

‘It didn’t happen on Wall Street or in the City…instead, it happened in a Belgian museum…’

As any mining start-up will tell you, exploration is a dicey business. It’s a safe bet that Central Africa has vast mineral wealth – but where, exactly?

Ordinarily it would take years of searching in malaria-infested jungles. But the Chinese have done something very clever. You see, there’s a museum in Belgium which houses maps dating back to the days of the Belgian Congo. One of things these maps show is – you’ve guessed it – the best place to mine for various minerals.

When a group of Chinese ‘tourists’ showed up at the museum, staff could be forgiven for thinking they were just another group of harmless holidaymakers.

But the souvenirs these guys wanted weren’t to be found in the museum gift shop…

Manraaj Singh has the full story in today’s FREE edition of Profit Hunter. Find out more HERE

For starters, the market got some shockers last week from European Central Bank (ECB) President Trichet. Mr. Trichet did everything except come right out and say he would raise interest rates next month.

I’ve never heard Trichet be quite so blunt in any of his speeches. So you can tell the rising inflation in the Eurozone is really getting to him. However, it’s not quite so simple. He may want to raise rates but he’s also battling the high EUR/USD exchange rate. That could force him to keep rates where they are, despite how he feels about inflation.

Plus, a high interest rate and a high exchange rate are starting to cause hard times for the Eurozone’s economy fundamentally. In fact, several of their numbers have been missing estimates lately. Before, that rarely happened.

So when Trichet “popped off” last week it instantly set the euro soaring against almost any other currency – especially the dollar.

Unemployment in America Rockets Higher!

Then at the end of last week, the unemployment rate came out for the United States. Last month, it hovered around 5.5% and was expected to inch up a hair this month. However, it launched a half point higher in just a month’s time. That’s the fastest unemployment has risen since 1986.

That’s a huge leap. And everyone is noticing – even the politicians. Don’t forget the election coming up.

No one wants to be the president who either was in office or coming into office when unemployment numbers are soaring.

As a result, the dollar tanked and the euro soared once again.

Why? Well, a couple of reasons. First of all, more unemployed people means less money sloshing around out there in the retail market place to be spent. So it will spill over into corporate earnings which may cause more layoffs.

Of course the other main reason is that the Fed Chairman is having a problem raising rates – when he knows higher rates will likely slow down corporate America even more and make the situation even worse.

Yet, the Man behind the Fed also has to control inflation. Yet he also has to help keep America employed and not kill the little bit of growth that we do have in the economy.

Pick Your Poison: Fight Inflation or Aid Growth

So what can central bankers do? Both Trichet and Bernanke are between a rock and a hard place. Trichet needs higher rates to squelch inflation, yet a thriving economy and a lower exchange rate. You can’t get all of that together; so now come the tough choices…

Then Bernanke needs to kill high inflation, yet keep America employed. Plus, he and Paulson are also trying to support the dollar. If they lower rates, they’ll stoke inflation and possibly cause the dollar to head lower and send the euro into the stratosphere.

So how does all of this unfold without the Eurozone or American economies getting clobbered? It’s not going to be easy.

That’s the tough part about the stagflation that’s been building in the economy. Your growth slumps, yet inflation doesn’t come down as the growth slumps. In fact, inflation goes even higher while growth slows.

So you can attack inflation and growth, and let employment suffer. Or you can allow inflation to get out of hand (which is a nightmare for a central bank) and allow the economy to grow.

With all of the hard choices and confusion in the air, guess where big institutions are running to until these guys get it all figured out?

When There’s Confusion, Money Runs to Two Places: Gold and the Swiss franc

The big name traders are dumping assets into the Swiss franc and gold. Remember when I said the euro gained against almost every currency out there? Well one currency that’s still beating the euro (even in the thought of a Eurozone rate hike) is the Swiss franc.

That’s right. Check out the chart below. The euro actually lost ground against the Swiss franc in these days of uncertainty. In fact, the Swissie even gained against the euro on the day that Trichet hinted at a rate hike. Normally that would send the euro soaring across the board and it almost did.

Though I couldn’t help but notice on these days where the money was flowing. It never ceases to amaze me. Once, the mighty Swiss franc was backed by gold so it was an obvious safe haven for traders. But today, the Swiss franc is not necessarily “safer” than any other currency.

Yet traders instinctively still run to this currency just as if it were backed by gold in uncertain times. So that’s one of the “safety zones.” Not because it’s one in reality but because it’s still treated as one by traders.

The “Unstoppable” Euro is Sinking Lower Against the Swiss Franc

Sofa retailers have been hammered. Anyone involved in selling ‘big ticket’ items, such as white goods (fridges, freezers, etc), has seen their share price tank too. Meanwhile, Homebase owner Home Retail Group (LON:HOME) warned that like-for-like sales at the home improvement chain had fallen 12% in the 13 weeks to May 31st.

But it’s also claiming some surprising victims. Carphone Warehouse (LON:CPW) took a pounding yesterday as it warned that broadband growth would be slower than it expected this year. Why? Because if you’re not moving house, there’s usually no impetus to go to all the hassle of changing your broadband provider.

But the property crash is far from being the only thing consumers have to worry about…

The house price boom has meant good times for retailers. Homeowners have been borrowing more money against the rising value of their homes (mortgage equity withdrawal), and then spending it on the high street.

But now that house prices are falling, the amount of equity left to withdraw is falling sharply. On top of this, lenders are now demanding that remortgagers have as much equity as possible in their homes, if they want to get decent rates on their home loans.

This can only be bad for the high street. Mortgage equity withdrawal fell from £13.7bn in the last quarter of 2006 to £7bn in the last quarter of 2007. Bear in mind that house price growth hadn’t even turned negative by that point. So MEW for the first half of this year will plunge again.

It’s not just about the amount of money people can borrow against their homes. It’s about confidence as well. Anyone who owns a home – even those with a reasonable equity cushion – is thinking: “how bad is this going to get? I’d better build up some savings, or pay a bit more towards the mortgage.”

And anyone who at some point in the last decade has said: “my home is my pension”, is now terrified that they will be spending their dotage living on baked beans and sleeping in soup kitchens. Suddenly that new widescreen plasma TV seems very much a luxury, not a necessity.

And they’re right to be worried. As Phil Dorgan of Panmure Gordon tells The Times: “The British consumer is more geared to house prices than almost any consumer in the world. There’s a high level of consumer debt as a proportion of GDP – if home prices fall it absolutely affects consumer spending and if we move into negative equity it will get even worse.”

All bad news. Hopefully if you’re a regular reader, you won’t be invested in any of the consumer-facing sectors (such as retailers) that have been battered in recent weeks. But even if you are, it’s not too late to get out – there’s plenty of scope for further falls.

Because, it’s not just about falling house prices anymore. Property prices may be tumbling, but the cost of everything else is going up. And consumers are very aware of it. The Bank of England’s quarterly inflation survey showed that the average consumer believes that annual inflation was at 4.9% in May. In February, they thought it was 3.9%. The Retail Price Index (RPI) shows that inflation is actually at 4.2%. And the official figure – the Consumer Price Index, which the Bank is meant to keep at 2% – is only at 3% so far.

This is a big worry for the Bank. For a start, it’s the highest that consumers have perceived inflation since it started conducting the survey in 1999. That’s no surprise really – the past nine years have seen China swamp the world with cheap goods, offsetting the central banks swamping the world with cheap money, so we haven’t seen inflation in all the places we’d normally expect to see it.

But now that we are seeing inflation rear its ugly head, the problem is that consumers will start to want more money from employers to compensate. Now the fact that the economy is heading into a downturn will offset some of that pressure – it’s not that easy to get a pay rise if you’ve got the threat of redundancy hanging over you – but it doesn’t simply mean it will go away.

The unions for one thing, have got their teeth into the idea, and not just in the public sector. The strike by drivers for oil giant Shell just goes to show what happens when you have a combination of weak government, a collapsing economy, and workers in positions of power.

But even if wage inflation doesn’t become an issue, the perception that life is becoming more expensive is even more bad news for the high street. If people are increasingly worried about stockpiling the necessities of life before they become even more costly, then they won’t be keeping money over to pay for luxuries.

That means all those second-line consumer-dependent stocks are also heading for trouble. The travel industry? Forget about it. This idea that they will somehow resist the downturn is laughable. Hotels, tour operators, airlines – I’d sell them all.

When the banking sector ran into trouble last year, the papers ran page after page of articles talking about how banks were an undervalued bet for ‘brave contrarians.’ All those ‘brave contrarians’ who bought the hype were then faced with collapsing rights issues and soaring mortgage arrears.

Expect to see similar articles about retail stocks. Just remember what happened with the banks, and ignore them.

At some point in the future, things will get better. At some point in the future, it’ll be time to go bargain hunting. But that’s a long way off from here.

Turning to the wider markets…

Overnight in Asia, Japanese stocks rallied 0.6% as the Nikkei 225 added 85 points to end at 13973, but in Hong Kong, the Hang Seng declined 0.8% to 22833.

Brent spot was trading this morning at $136, while spot Gold was at $870. Silver was trading at $16.52 and Platinum was at $2038.

In the forex markets today, sterling was trading at 1.9435 against the US dollar and 126.17 against the euro. The dollar stood at 0.6491 against the euro and 107.95 against the Japanese yen.

Source: The Stock Market Sectors You Should Sell Out of Right Now