Still bearish on 2005

The UK High Street had its worst Christmas trading period since 1981, new car sales fell by 8% in January in the UK, mortgage loan approvals in December fell by 38% and the US Federal Reserve has just confirmed its commitment to higher interest rates by raising rates.

This is not a good environment for corporate profits, revenues or just about anything else. What then is keeping the stock market afloat? A collective conspiracy to boost merger and acquisition activity would be as good an explanation as any other.

However, stock markets crash under the kind of fundamental pressures elucidated in the first paragraph which does not even include the biggest blot on the horizon - the prospect of a further fall in value of the US dollar.

George Soros - the man who made a $1 billion betting against the pound in the early 1990s - and Bill Gates and Warren Buffett, two friends who happen to be the world's richest and second richest men, are all convinced that the US dollar has further to fall. With US equities overvalued on most measures the dollar's fall would precipitate an almighty financial crash.

Not surprisingly then at the World Economic Forum in Davos a number of prominent economists were on the record as seeing a financial crash, possibly within a week!

Last week a few well chosen words from Federal Bank Reserve Chairman Alan Greenspan appeared to paper over the cracks, and the dollar rallied along with the stock markets.

The hope is still that the global growth stimulated by a long period of low interest rates will somehow roll-over the US economy despite rising interest rates.

However, unless you think you have a better insight to global investment markets than Bill Gates, Warren Buffett and George Soros then it would be unwise to pay too much attention to Mr. Greenspan.

The prudent investor in 2005 will stick to cash and commodities, particularly gold and oil. The present dip in gold prices is a great buying opportunity, and will possibly be the last one before financial markets become unstuck.

Markets are just too far out of track with reality for investors to feel any degree of comfort, and even those who consider themselves conservatively invested should watch out.