The US economy is clearly in a very problematic situation. The outlook for 2008 is clouded by the vu...
The US economy is clearly in a very problematic situation. The outlook for 2008 is clouded by the vulnerability of US consumer demand as a result of the housing market slump. The problems are too serious to be eliminated in a matter of weeks or even quarters.
But these clouds do have a silver lining, in the form of the rapid response by the Federal Reserve, as well as the US government, in slashing interest rates and pushing through a fiscal stimulus package. Central banks are making frantic efforts to reflate the economy. There are good reasons for them to do this.
Will they succeed? The US economy is very dynamic and flexible, and I expect it will react favourably to the stimulus that is being provided. Hopefully, a recession in the classical sense (two consecutive quarters where the economy actually shrinks) will be avoided.
Of course, there will be a price to pay. With US inflation above 4%, we appear to be moving into a situation of negative real interest rates, particularly if the Fed funds rate is cut further, towards 2%, which is not at all unlikely.
On the bright side, I feel the US dollar's weakness is largely priced into stockmarket valuations by now.
I continue to take the view that the dollar is extremely cheap from an economic perspective.
The present climate should also support gold and commodities, even at the current elevated levels. I expect gold to move much higher.
The financial problems are huge, and the only way to solve them is to flood the market with money.
One can argue that gold is simply a measure of the intrinsic value of the dollar. A simple yardstick to use when assessing the prospects for gold is thus interest rates: I would only be inclined to move out of gold if the Fed funds rate were pushed up to levels considerably above inflation, and that is hardly likely at the moment.
In some quarters, there are suggestions that the declines suffered by US financial stocks in recent months offer attractive opportunities. I am not convinced.
The whole financial system is overly leveraged. It is now some eight months since the credit crisis erupted but I still feel that the worst is yet to come.
- The US dollar is extremely cheap;
- Gold is set to move much higher;
- Worse is to come in the US financials sector.
By Francois Moute, manager, ABN Amro Funds US Opportunities fund.
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