That was the general reaction from the press when US food giant Kraft launched its first bid for British confectioner Cadbury less than two months ago. Pundits spewed out potential target prices like bingo numbers – £8, no £10, no £12! – and analysts scribbled out scenarios involving white knights and rival bidders from across the globe.

Reality has been a little more disappointing. Despite attempts to talk up the deal, no rival bidders have come forth. And yesterday Kraft came back to the table with an offer that can only be described as – as Cadbury’s board put it – ‘derisory’.

It’s just another sign that there’s a vast gap between conditions in the financial world and those in the ‘real’ world…

Market hopes are stretched far beyond reality
The Cadbury / Kraft bid saga shows just how far market hopes are stretched beyond reality.

Right up to yesterday’s bid deadline, analysts and investors were clearly expecting Kraft to pull some rabbit out of the hat that would give them an excuse to drive the confectioner’s share price higher from its already optimistic level of around 760p.

Instead, Kraft came back with an offer that suggested that, frankly, they can take Cadbury or leave it. The bid terms were exactly the same, which – because Kraft’s share price has fallen since the original bid was made – meant that the actual per share value had fallen, from the equivalent of 745p to 717p.

Yet, the Cadbury share price is still hovering pretty much exactly where it was yesterday. You can read more about the background to the story, and what we reckon Cadbury shareholders should do now, in my colleague David Stevenson’s blog on the topic.

What’s perhaps more interesting about this bid battle is what it says about the bigger picture and the market’s psychology right now. When this deal was first announced, the excitement in the City pages was palpable. This was the return of big deals, a sign that the recovery was on track.

Click here to finish this article at Money Week UK.

Probably not. First off, new Asian buyers and a “whole pile of Johnny-come-lately types” are fuelling current demand. A six-litre bottle of Château Pétrus 1982 recently sold for a record £60,000 at auction in Hong Kong, a city where wine imports rose by more than 40% in the first eight months of the year.

Meanwhile, in Christie’s spring 2009 global sales, Asian and Chinese buyers accounted for 61% of the total sale value, compared to 7% in 2005. “With demand coming almost entirely from Asian buyers, and with that demand so heavily biased towards one particular producer, it would be wrong to start heralding the return of a bull market”, say the people over at the Vintage wine fund.

Asia is beginning to resemble Japan in the late 1980s, when cash-flush companies and property developers splurged on trophy works by artists such as Van Gogh.

But there’s another reason why wine just isn’t such a great investment.

Read the rest of the story on MoneyWeek.com.

Now the blame for spiraling food and oil prices is increasingly being laid at the door of Fed Chairman Ben Bernanke for cutting the fed funds rate to 2% and unleashing yet another wave of inflationary surplus liquidity.

The fallout is now being seen as India, China, the Philippines and Indonesia hike their own interest rates to rein in rising prices.

Consumer prices jumped 7.7% last month, down from 8.5% in April, but inflation there remains top of the list of economic concerns.

While the US and most of Asia struggle to put the inflation geenie back in the bottle, David Stevenson in Money Week heaps praise on European Central Bank president Jean-Claude Trichet, who is fast becoming the hero of inflation fighters everywhere…

Because yesterday, amid the usual turgid guff that central bankers usually churn out when they’re doing nothing very much, he came up with a bit of a bombshell – an imminent interest rate rise.

Although key rates are being kept unchanged for now, the ECB’s Governing Council has been getting more and more twitchy about climbing consumer prices which have risen “significantly” since last autumn due to soaring energy and food prices. And now Monsieur Trichet and co. expect inflation to stay high for longer than it first thought, because money supply is still growing too fast.

So not only are Euro central bankers staying “in a state of heightened alertness”, they’re prepared to “act in a firm and timely manner to ensure that medium term risks to price stability do not materialize”, and to show “strong determination to anchor medium and long-term inflation expectations in line with price stability.”

In short, expect an ECB rate hike next month.

It’s certainly seems to have come as a bit of a shock to many analysts. Just a week ago, Capital Economics was fairly confidently predicting that with eurozone inflation set to ease later this year, “the next move in interest rates should be down”.

But it’s good to see that some central bankers this side of the Atlantic are still taking their jobs seriously and trying to maintain the value of their currency. Which, it seems, the ECB can do rather more easily than Bank of England governor Mervyn King.

He’d probably like to do the same as the eurozone, with UK inflation seeping above the 3% mark at which he has to pen an open letter to Chancellor Darling explaining what’s gone wrong, but his hands are tied while the UK economy is falling off a cliff. And it looks like the knots are getting tighter by the day, with the unwelcome news that Mr Darling has now decided to give Mr King some extra outside ‘help’ in “advising” the Bank about “financial stability”.

That sounds horribly like Government-speak for finding ways to fiddle around with the Old Lady’s independence, and specifically to find ways of altering the Bank’s 2% inflation mandate. That would be a serious mistake – changing the target again would just chuck any remaining financial credibility the UK has left, right out of the window.

Talking of being a credible inflation-battling central banker, US Federal Reserve boss Ben Bernanke certainly isn’t one, having presided over a cavalier slashing of American interest rates in the face of a worse inflationary storm than the ECB is battling. But to be fair to the Fed, not quite all his colleagues are in quite the same boat.

Richmond Fed president Jeffrey Lacker has just ‘fessed up to his fears that the Fed’s lending to securities firms introduced in March could stoke up problems in the future, because it might “induce greater risk taking, which in turn could give rise to more frequent crises”.

In other words, we could soon be right back in the same boom-to bubble-to-bust mess from which we’re now suffering.

Thank goodness someone in authority in the US has seen the dangers. Though it’s a shame that Mr Lacker isn’t running the whole Stateside central bank show. Then we might see some rate rises over there, too.

However, Ben Bernanke’s newfound concern about the strength of the US dollar this week has hit gold and silver prices, and according to Kitco Casey’s Daily Resource, prices could tread water in the coming months.

Money Week, however, remains bullish about precious metals, despite the recent slide in prices. This from Dominic Frisby:

Given that we are now in a seasonally a weak time of year and given also the move it has made since last August, I am impressed with gold’s resilience. I am even more impressed with silver, which quickly retraced much of yesterday’s losses. I will write more on this in the coming weeks, but it seems that silver’s time may finally be coming.

This sentiment is echoed by silver expert Theodore Butler, who singles out the white metal as a prime candidate for the next commodity bubble.

Not everyone is so optimistic. Last week, Eric Roseman jumped off the silver ETF bandwagon, warning that a boost to supply in 2008 could harm the mineral’s price potential:

Right now some metals are poised to reach new all-time highs because of production deficits (aka lack of supply), while other metals still remain hostage to an onslaught of new supplies – so their prices are dropping.

Silver falls in that “too much supply” camp. More than any other precious metal this year, silver’s prices will be put to the test. We’re all waiting to see if silver’s price can hold up under the growing bombardment of new production.

Over the last five years, silver prices have surged more than 250% to just under US$17 an ounce at the moment. On May 20th, my Commodity Trend Alert (CTA) service, turned “neutral” on silver, after my CTA subscribers earned big profits on several existing open silver positions since 2003.

But the tides have turned. And now rising supplies are forecasting a sizable silver correction.

Meanwhile, gold is still soaring. Gold production peaked in 2001 and continues to decline this year, which is VERY bullish for gold prices. But that’s certainly not the case for silver and to a lesser extent, palladium.

Gold and silver generally track each other in a bull or bear market. When gold goes up, silver goes up and vice versa. But in this case, a divergence might be possible, if only temporarily.

In the base metals arena, a similar price divergence has already happened after seven years of generally spectacular gains for the complex. These include namely copper, lead, tin, nickel, iron-ore (steel), aluminum and zinc. Over the last 18 months, nickel and zinc prices have crashed while tin, lead and copper prices have posted gains. It’s not impossible for metals to break away from the primary uptrend if supplies begin to saturate individual fundamentals.

Over the last 12 months, gold prices have risen 37% while silver has gained 31%. Both metals continue to track each other on a total return basis.

But thus far in 2008, gold prices have risen just 8% while silver has rallied 15%. The fundamentals, however, don’t support silver’s higher returns this year.

Gold is rapidly approaching its first year of net supply deficit while silver is increasingly becoming a net surplus commodity. And according to textbook economics, rising supplies eventually dilute a rising price trend and drag prices back down.

Considering the demand for both silver jewelry and silver industrial supplies is waning, the bulk of global demand for silver will have to come from investors going forward. This will come mainly from exchange traded funds like SLV or the iShares Silver Trust in the United States and other silver ETFs traded in London and Zurich.

I have serious doubts investor demand will continue to support silver at these levels without suffering a major correction first.

The iShares Silver Trust has already seen a massive increase of silver accumulation since 2006 – over 180 million ounces. Silver supply has surged since 2001, according to GFMS, a precious metals consultancy firm, rising to 670.6 million ounces. Unless investor demand consumes this rising supply – and more is projected in 2008, then prices will decline. That’s because industrial demand has probably peaked.

Last year, industrial demand for silver increased 7.2% to a record 455.3 million ounces, according to the 2008 World Silver Survey. That offset the long-term decline in demand for traditional usage, mainly in photography, jewelry and silverware.

But another survey by Barclays Capital points to alarm bells for the silver market. The survey shows new supplies just hit the market this year. Barclays believes mine production will grow by 6.5% in 2008 and faster than last year’s increase of 3.6%. That could create possibly the largest surplus of silver in over 20 years.

A disappointing initial public offering (IPO) in London is another bearish signal for silver bulls.

Mexican silver company, Fresnillo PLC, went public in London earlier this month and declined 7.5% on its debut — that’s a bad sign. Despite stronger silver prices this year, the IPO was not received well in the markets.

Sweden’s Riksbank said the global credit crisis increased the sensitivity of banks to other shocks, adding that it had warned that growth in the Baltic states could slow down more suddenly than expected.

Dominic Frisby in Money Week reckons the spread of the global credit crisis will benefit gold and precious metals.

And all these meaningless statements from central bankers about fighting inflation do is present us with another opportunity to buy them.

Given that we are now in a seasonally a weak time of year and given also the move it has made since last August, I am impressed with gold’s resilience. I am even more impressed with silver, which quickly retraced much of yesterday’s losses. I will write more on this in the coming weeks, but it seems that silver’s time may finally be coming.

Another retest of $850 is possible for gold, even likely. But the technical support at this level makes it such an obvious buy-point, I really don’t see it slipping much below there for any significant period, except perhaps to shake out a few weak hands. $850 is where I have some buy orders. Perhaps you should have some there too.

“The EU should be working with the United States to promote new technologies, not finding protectionist gimmicks to apply new duties to these products,” US Trade Representative Susan Schwab said to Thomson Reuters.

“Investors may have fled the US dollar, and watched the eurozone grow relatively fast against its lagging American counterpart,” says Jody Clark in Money Week, “but they’ve ignored the hidden weaknesses on this side of the Atlantic.

“This year’s first-quarter GDP growth across the eurozone flipped up a good 0.7%, but that figure was skewed upwards by the rollicking performance of the German economy. German GDP growth climbed 1.5% on the back of a roaring manufacturing base oiled by booming exports. In contrast, Italy only managed expansion of 0.4% and Spain 0.3%, while in Portugal, growth actually fell by 0.2%.

“Meanwhile, inflation is on the rise, led by a good 4.6% in Spain and 5% in Ireland. Both are well outside the ECB’s 2% target. The spectre of stagflation – a stagnant economy plus rising inflation – is rearing its ugly head. Indeed, ’stagflation is a situation that we experienced some years ago, it could return,’ said Spain’s Economy Minister Pedro Solbes earlier this month.”

The US should get its house in order too, says Chuck Butler in The Daily Reckoning.

“The currency markets do not like any form of protectionism, and a country that puts protectionism in place usually sees the currency suffer.

“So, think about this for a minute… We have an election process going on in the United States that will come to a head in November, which is six months away. During that six months there will be candidates taking shots at OPEC and China (the two main ‘outside’ culprits of the trade deficit… But we would never go after the US consumer and tell him to save instead of spend now would we?)”

The price of an average home dropped 2.5 percent from April to 173,583 pounds ($344,000), Britain’s fourth-biggest mortgage lender said today in a statement. That’s the largest decline since the index started in January 1991. From a year earlier, prices fell 4.4 percent.

“Things are turning down in the UK – big time,” says Merryn Somerset Webb in Money Week.

“The housing market gets worse by the day; there are signs unemployment is about to take a turn for the worse as jobs in construction and retail start to go; oil prices have now started to ‘melt up’ – even more quickly than I suggested they would – and rising inflation means no interest rate cuts.”

This puts the core US inflation rate up 3% in the past year, the biggest year-over-year rise since late 1991.

The PPI figures are unlikely to affect the markets which, according to a report by MarketWatch, “don’t seem to trust the government’s inflation figures that show falling energy prices in a world of record crude oil prices.”

The government’s data are seasonally adjusted to hide the impact of normal seasonal variations to focus on fundamental changes in prices that are not driven by the ebbs and flows of the seasons. Because energy prices typically rise more in April than they did this year, the seasonally adjusted figures showed a 0.2% decline. In unadjusted terms, energy prices rose 2.9%.

“Since the beginning of the credit crisis last summer, Fed policy has been purely inflationary,” says Bill Bonner in The Daily Reckoning, “intended to convince people that they had more money and credit than they thought…and that they should spend it and invest it. But that policy can’t work forever. Eventually, consumer prices rise sharply. Then, the game is over…the Fed has to ‘lower inflation expectations’ before it can inflate again. The hocus pocus only has a positive effect, in other words, as long as people are misled…once they catch, the jig is up.”

And on a global scale, “rising raw material prices, in particular rising food prices, are now causing real hardship and what represents a cause for shoppers in developed economies to grumble is a matter nothing short of life and death for the millions less fortunate around the world,” says Money Week editor Merryn Somerset Webb.