Lord William Rees-Mogg (Fleet Street Invest UK):
In the last six months there has been a rebound of 50% in the great majority of world stock markets.

There has also been a comparable rebound in the price of oil, with West Texas oil rising very close to $80 a barrel. In the oil market there has been heavy two-way trading in options. There could be a sharp spike in the oil price if speculators have to cover their positions.

At the same time the US dollar has remained weak, and now stands at $1.4886 to the euro and $1.66628 to the pound. This is close to a 14-month low on a trade-weighted basis. The poor performance of the dollar reflects the low US interest rates and the twin US fiscal and trade deficits.

The demise of the dollar

The dollar nevertheless remains the world’s leading reserve currency, with the euro in second place. Investors are naturally anxious to protect themselves against markets, including currency markets, which have shown such a high degree of volatility.

The Chinese, who have the greatest number of dollars in their currency reserves, have already suffered substantial losses.

In what amounts to a crisis of the dollar, the euro is in second place as a reserve currency, but there are potential threats to the future of the euro, due to the weak productivity of the Mediterranean economies. There is a big stretch in productivity growth between the German and the Southern European regions.

The fall in the dollar against other currencies includes a devaluation of the dollar in terms of gold, which now seems to have stabilized at a dollar price of $1,050 an ounce.

The circumstances do indeed appear to be uniquely favourable to gold.

Interest rates and therefore carrying costs are exceptionally low. The dollar is exceptionally weak. The technical market position is strong, including good demand for gold in terms of jewellery. The oil price – which is often linked to gold – is rising. Those who believe that oil is due for a further rise to $100 a barrel are likely also to be confident about holding a proportion of their investment . . .
Click here to read the rest of Lord Rees-Mogg’s article at Fleet Street Invest UK.

The recently released data from the National Association of Realtors are more evidence of the continuing slump the US property market.

The euro hit new highs today on the news, surging to $1.60.

“In the United States and in the United Kingdom, it is clear that the housing boom has been a bubble,” says Lord William Rees-Mogg in Whiskey and Gunpowder.

“In the United States, the bubble has already burst — the only question is when the US housing market will reach its low point. Britain is following the same track, but is somewhere between six and twelve months behind.

“The fall in the house market has wiped out very important assets of the banking system, leading to the collapses of Bear Stearns and Northern Rock and the distress of other banks. It is difficult to put a figure on the contraction of credit that has resulted.

“The I.M.F. has suggested $1 trillion, which is an impressive round number. What has actually been lost is a multiple of the fall in house values, since there is a multiplier effect on credit and on the willingness to lend.

“A bank which has lost a billion dollars in the housing market, or some derivative of the housing market, will feel itself to be short of capital and will seek to draw in as much cash as it can. It may well go from over-generous lending to exaggerated borrowing, which will take it from being a net lender to being a net borrower.”

Lord William Rees-Mogg says that this is just the tip of the iceburg… “I do not believe that the world is on the edge of another Great Slump, but the combination of the deflationary effect of the collapse of a widespread housing bubble with the inflationary effect of higher prices for oil and food does present Governments with the most difficult economic problems since the 1970s. It was then called “stagflation,” to reflect stagnant inflation. Both horns of the stagflation dilemma now look sharp and threatening.”