US dollar in crisis, US stocks slump and credit spreads tighten

Is this the start of something much bigger? It would be unusual if this proved anything more than a dress rehearsal for a larger crisis this autumn. This is the holiday season and many traders and fund managers will be away from their desks.

What does seem to be brewing is a major US dollar driven financial upset. Readers of AME Info will perhaps have grown tired of the incessant warnings in these columns that all is just not well with the US and therefore the global economy.

Four years of rising stock prices have lulled many investors into a false sense of security. It seemed not to matter that the US currency was losing value faster than stocks were gaining value, or that inflation had picked up all over the world, or that the US housing sector is in a meltdown and sub-prime mortgages in crisis.

Twin deficits

Of course it matters a great deal! It also matters that US government spending is too high with $135 billion to be wasted this year on a war that seems without an end in Iraq.

Now these economic chickens may be coming home to roost. But we should not expect the US dollar to shoulder the implosion of the US economy alone for much longer.

The next place to watch for weakness, apart from the bond market and the tightening of credit is surely the stock market, which had boldly soldiered on to a record high of 14,000 with scarcely a thought about the rest of the economy.

Perhaps 20 years after the 1987 Wall Street crash we are heading down the same road again. What would that mean for the Gulf States?

Stock market blues

Well in a really big sell-off these emerging stock markets would be sold down heavily and commodity prices would tumble too. The surprise winner would likely be the US dollar as financial assets converted into greenbacks, and the US currency would rally - not helping economic recovery one iota it might be added.

Real estate markets are the next skittle to tumble in this process, although the US housing market might then start to find a bottom to its current crisis. Falling oil prices would be inevitable with a US stock market crash predicting an imminent recession in global business activity.

Where would investors then go, aside from into cash? Precious metals would surely be the first asset class to recover from a major asset sell-off, particularly if the Federal Reserve did the obvious thing and cut interest rates sharply and gave up on controlling inflation in the higher cause of saving the global economy.

Are we back to the 1970s? If we are then a second oil price shock could also be on the cards and in 1979 that came from Iraq.

It could happen again. The geopolitical risk of oil has not gone away. And that would mean a swift recovery in fortune for the Gulf States from any problems this autumn in financial markets.