For What It's Worth

I wonder whether anyone still remembers all the fear surrounding the US economy in the last quarter of 2006? The doomsayers were predicting a never-ending hike in oil and gas prices, prompted by, among other reasons, Venezuela or Iran turning off the taps, political tension in the middle east, increased consumption: you name it, there was a reason. I remember, much to my frustration at the time, when I was trying to write an article with the premise that big declines in the oil price were almost a certainty, and I couldn't find an analyst who would say the oil price was due for a fall. It was at that point I knew the price was coming down: if there's one rule in the market, it is never say never, and when everyone is saying never, go the other way.

The other concern was GDP. I pointed out back then that too that it was in fact a healthy sign for the economy that GDP was down, because when you correlate this figure with private investment, they are pretty much inversely related right before a big bull run, after which they return to parity with one another as dividends and investment pays off in productivity.

The situation today?

Oil is at $58, and falling, the Dow is at 12,786.64 and the Nasdaq is pushing the crucial 2,500 mark by about 13 points. And what about GDP? Well, here's an indication:

LONDON (Dow Jones)--Economic growth in 30 of the world's richest countries stepped up a gear in the fourth quarter of 2006, thanks to buoyant activity in the euro zone, Japan and the U.S.

... The U.S. continued to account for the largest share of OECD (Organization for Economic Cooperation and Development) growth, contributing 1.2 percentage points to the 3.3% annual growth rate.

And for what it's worth, here's what happens next. The current US economic and market strength will continue at a bullish pace right up until about September/October, when a spew of economic data will show how in Q2 we got just a little ahead ourselves. This, combined with some instability created by a looming election, will prompt some of the big pension funds to throw money back into gold, and it will have a natural, short-term correcting effect for markets (which in all probability probably won't be needed so it's a time to buy then). However, because of this overreaction, we'll probably see that growth re-bound in the final quarter of the year as Q3 fundamentals show everyone that things are actually still in pretty good shape.

And while the Japanese may raise rates, as might China, don't expect too much discipline from the governments of these economies. When Asia has a run, she's usually more afraid of stopping that run too quickly than she is of letting it overheat, so though she might put in a quarter-percent rate hike here or there for show, it's not in keeping with the general ethos of the region, which tends to get a little overexcited about its own economic prospects (usually as a result of knock-on growth from the European region and the U.S.A.) In other words, right now, you want to be buying Japan.

Some more news on Hong Kong tomorrow.