Hurricane set to hit financial markets

The monumental complacency of the global financial community is just incredible. The US has just been battered by the worst hurricane in history, causing $150 billion plus in damage, and yet the US Federal Reserve carried on raising interest rates this week as though nothing has happened.

Now we have a hurricane of the same intensity about to hit the US again. It is almost as though the financial world had forgotten that the paper they trade is but a proxy for reality.

Commodity prices show a different story. Gold was at $472 an ounce at the time of writing, an 18-year high, and US light crude back to around $68-a-barrel.

The impact of high commodity prices may not yet have shown up much in inflation figures. But they are certainly showing up in consumer spending in the industrialized world which is in showing a sharp downturn.

Let us not forget that 45% of industrialized economies comprise consumer spending. When people stop buying things that is very bad news.

So why is the financial world so complacent? Perhaps it will take another hurricane in the southern US to wake capital markets up from their long Indian summer.

Lest we forget: high oil prices are a direct cause of inflation, and that means higher interest rates which is bad news for bonds, stocks and real estate.

Tell the people filling up their tanks with petrol this week that there is no inflation in the system. Of course there is! The rising cost of fuel will impact on the costs of all businesses, everywhere this winter, and that will not be good for profits.

Meanwhile, if the consumer spends more on petrol, there is less to spend on other things; ergo business faces a recession.

This impact will also be felt to a lesser extent in the oil producing economies whose domestic economies have also seen their stock markets and real estate sectors inflate in recent years. However, the impact will obviously be greatly cushioned by the huge inflows of capital from the industrialized countries paying high oil prices.

But nobody in the Middle East should be too complacent either: an oil shock may well be accompanied by an unexpected impact on local capital markets and real estate which will be battered by the same forces that will drive global financial markets downwards. So watch out for Hurricane Rita!