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Bears Spoil The "goldilocks" Economic Party

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http://www.thisismoney.co.uk/investing-and...5&in_page_id=23

Bears spoil the Goldilocks party

Brian O'Connor, Daily Mail

12 June 2006

Shares slumped again this week after two weeks of moving sideways. They are bouncing back but prices are swinging about and nerves are taut.

Below the top level, Footsie 250 shares have seen heavy falls. Among some small companies, trading has almost dried up. 'Business as usual' this is not.

What is wrong? Astute market watcher George Finlay of stockbroker Hargreave Hale says the real fear is that the 'Goldilocks' scenario is coming to an end. Goldilocks, where the world economy is 'not too hot, not too cold' was based on Asian countries pumping out goods at ever-lower prices.

This enabled Western consumers to go on living beyond their means without a serious rise in overall inflation. For example, clothing costs in Britain have fallen for a decade - in the US, they fell 1.5% a year over five years. US car prices dropped 1% a year as the motor giants switched to making them in cheaper countries.

These gains enabled 'domestic' inflation to run up without upsetting the applecart. But a breakdown of the US consumer price rise of 3.6% in the year to April - which started the markets' recent falls - suggests the gains from imported deflation are shrinking. If low global inflation depends on China churning out cheap TVs and fridges, and China's huge growth pushes the price of the raw materials it needs through the roof, something has to give.

The underlying worry is that Western inflation will rise to 5% or higher, bringing interest rates up to 6% or 7%, the highest for many years. Some reckon the true US inflation rate is already 5.5%. Another risk is that the huge US trade deficit sends the dollar into free fall.

The third risk is that the market gyrations get heavily indebted traders into trouble. After five years of ultra-low interest rates, their luck is running out. Hedge funds and others using the 'yen carry' - borrowing in Japan at below 1% - are bleeding after the yen rose 10% against the dollar. Their forced selling of Japanese shares has wiped 16% off the Nikkei index. Other overheated markets and currencies, from India to Iceland, have tumbled.

It is salutary to see just how many 'professional' traders piled into these markets using other people's money. For these, the Goldilocks era has faded. For the rest of us, the outlook is more risky. Finlay thinks the risk may already be priced into Footsie 100 stocks, which sell at barely 12 times likely earnings. But he says: 'We should all mourn the passing of Goldilocks.'

What should investors do? So far, it is more a case of higher risks than the end of civilisation as we know it. But you should avoid the more speculative stocks. Since May, I have been advising the sale of some earlier tips. Today, I would add Resources Investment Trust, tipped in 2002 at 147p, and now 223½p. Sell.

The Real Good Food Company, tipped at 109p, has slumped to 46p. Sell. Fallen software star iSoft was sadly tipped in April 2002 at 285p. It is now 57¾p. If you have not yet used a stop loss and sold these earlier, then get out now.

On the other hand, breeder Genus, tipped at 225p, is 449¾p. There at least, the bulls are still running - and doing their thing. Hold tight!

:o:o:o

Use of the phrase "so far" in the above passage says it all...

So far, it is more a case of higher risks than the end of civilisation as we know it

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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