Week ending 3rd February 2006      

Staying with the Fed, it announced a further 0.25% interest rate hike to 4.5%, the 14th in 18 months and Easy Al stated that, ‘Although recent economic activity had been uneven, expansion in economic activity appears solid’. This was despite lower than expected economic growth in Q4 2005. In December, US consumer spending rose by 0.9%, whilst incomes were up by just 0.4%. The already fragile savings rate is now at -0.7% and has been negative for 8 of the past 9 months. US consumer confidence fell, as did US unemployment, which for January stood at 4.7%, a 5 year low. Turning to the markets, technology stocks were under pressure, as were the banks. This weighed on the main indices, as the Dow fell by 1%, whilst the S&P 500 and the Nasdaq Composite were lower by 1.5% and 1.8% respectively.

Euro- land’s Central Bank, the ECB, left interest rates on hold at 2¼% and announced that business loan demand rose ‘remarkably’ during Q4 2005, as companies increased inventories and stepped up investment. Meanwhile in the UK, the number of home loans approved by UK mortgage lenders rose to the highest level in 12 months in December, according to the Bank of England. Meanwhile, UK house repossessions surged by 50% in the final quarter of 2005 versus a year earlier, to the highest level since 1993. It was also reported by the Department of Trade and Industry that personal bankruptcies in the UK rose by 15% in Q4 2005 and by 57% on a year earlier. Over the week, the UK FTSE 100 index fell by 0.5%, the French CAC 40 gave up 0.4%, whilst the German Dax was level.

Out East, South Korea’s service industry expanded for a 10th consecutive month and at the fastest pace in 3 years in December, buoyed by consumer spending in Asia’s 3rd largest economy. Unemployment levels fell in both Japan and Singapore. Australasia’s real estate slump (at least on its east coast) saw the collapse of WestPoint last week. WestPoint invested in bundled mortgages, offering its investors a 12% return on capital (OZ official rates are 5.5%). Once property prices stopped rising in late 2004 and started to fall by mid 2005, the company could only meet this return by using new investments to pay older ones. They call this a Ponzi Scheme!

Japan’s Nikkei advanced by 1%, whilst the Hang Seng fell by 2% in a holiday shortened trading week.

On the currency front, the $US index added 0.5% and within the treasuries complex, 5 and 10 year yields spiked by 4.2% and 3.3% respectively over the week, ending it at 4.5% and 4.53%. Next week sees the return of the 30 year bond to the treasuries arsenal, which is sorely needed as the US reaches its debt ceiling yet again.

Within the commodities complex the $ oil price fell by 4.5% ending the week at $64.8 a barrel. $ Gold continued its run of late, advancing by 1.8% or $8.6 to $569oz.

So goodbye Al and welcome Ben (Benanke that is, the new FOMC Chairman). According to the Wall Street journal, “The paradox of Alan Greenspan’s achievement as he leaves office, is that nearly everyone is praising his performance but no one seems to know exactly how he did it.” His secret appeared to be the trick of ever expanding credit. Yet he was known to say in private during the 1960’s that the Great Depression was the consequence of the Federal Reserve repeatedly placing ‘coins in the box’ during the 1920’s. We all know what happened next!

“An economist is a man who states the obvious in terms of the incomprehensible”

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