Buy in haste, repent at leisure

It was curious to read in 'The Sunday Times' that the Middle East has invested a surplus of some $450 billion due to the present oil boom, and that the largest investor in US Treasury bonds this year is not China but the GCC Oil States.

So it is the oil surplus that is keeping mortgages low in the US at the moment, and fuelling an unsustainable house price boom. However, high oil prices do also seem to be damaging the real US economy, as General Motors' 25% collapse in sales would suggest.

When this happens to the largest US manufacturing company you do have to wonder whether the GDP figures are telling the truth. Ford's figures were not much better either. Maybe the recession that some commentators have been predicting is rather closer than statisticians would have us believe.

A recession in the US is the one thing that will cool down oil prices, although the supply situation is unlikely to let prices crash through the floor. But an overheated economy like China would surely suffer a leveraged implosion if US trade turned down significantly.

Asian crisis part II?

That would mean a re-run of the 1998 Asian Financial Crisis. Europe would also not be immune, as the US is an important export market for big exporters like Germany; this would put the bloated cost-structure of Europe under even greater pressure; and in the UK the emerging consumer/housing recession would widen.

In such an environment the high levels of global stock markets should signal 'exit now' to all but the most long-term of investors. How can a real US economy in which General Motors and Ford report collapsing sales be in an expansion phase?

The scene is set for a repeat of the mid-1970s energy crisis and asset price collapse. Then soaring oil prices popped a real estate and stock market bubble that left cash as the best performing asset in the late 1970s, apart from oil, gold and other commodities.

Arab investors chased gold to an inflation adjusted price of $1,500 in 1980, compared with $465 an ounce today. It will be interesting to see if history repeats itself, and commodities emerge as the winner from a nasty meltdown in equities and real estate.

The jury is out on whether such a phenomenon would spread to the Middle East itself. But local stock market valuations are at such a high level that the suggestion that oil prices might be about to fall back to more reasonable levels might also result in a stampede for the exit door.

This really is a time for the cautious investor, and being long on gold as a safe haven in a financial crisis looks good advice.