THE CURRENT U.S.ECONOMIC SITUATION AND ITS IMPACT ON THE GLOBAL INVESTOR

By Roland Lee, 15 March, 2008

There is an on-going flight to safety. This can be witnessed from a decline in the yield of the 3-Month U.S.Treasury Bill (T-Bill) to below 1.5% in March 2008 compared to being above 4.7% in October, 2007. This indicates that the demand for the T-Bill is significant and it represents an uncertainty of how the market will pan out in the short term.

The demand for this short-term T-Bill will not be good for the stockmarket in this three-month period as it removes money from investing in the market.

The uncertainty is exacerbated by many outstanding issues. The market is uncertain as to how successful the solutions that the U.S.authorities are putting in place will be. Some of the outstanding issues include:-

• Sub-prime loans. The negative impact of problems created by U.S. mortgage-backed securities globally does not seem to be over. Even well-rated mortgage-backed bonds are currently only fetching a fraction of their face value. Unless amicably resolved, this problem will be a constant drag on the recovery of the stockmarkets.

• U.S.jobs. In February 2008, instead of an expected 23,000 more jobs, the news that came out showed 63,000 fewer jobs. This cannot be good for an economy like the U.S. that is dependent on consumer spending. Fewer jobs and a slowing economy means more people will be careful on how they spend. This will have an impact on the retail sector which in turn will impact the manufacturing sector and related sectors.

• U.S.economy. The meltdown in the pace of growth of the U.S.economy will be felt globally as many countries worldwide have the U.S. as their main trading partner. The recent announcement by the Federal Reserve (the Fed) that they plan to pump in $200 Billion into the U.S. economy is certainly good news. The latest news that the Fed has used a rare procedure to support troubled Bear Stearn companies, coupled with the expected announcement of another significant drop in interest rates when the Fed meets on March 18, 2008, clearly shows that the U.S. authorities are doing everything possible to avert a collapse of the U.S. financial system. Hopefully the measures undertaken can stop the negativity that is prevalent currently in the market. Certainly it may help the market recover for the short-term and holdout for positive earnings reports from U.S. companies in the coming April earnings season. If that pans out then the market may fractionally recover over the April / May period. The market has a further chance of sustaining a positive outlook further than the month of May as US taxpayers may start spending their $150+ Billion worth of tax refunds from the fiscal stimulus passed by Congress earlier this year.

• U.S.Dollar. There is concern that the $200 Billion package proposed by the Fed may result in the further weakening of the U.S.Dollar against other major currencies. Such weakening of the U.S.Dollar should be a big help for U.S.exports but cannot be good news for global investments based on US Dollar terms.

• Commodities. The weakening of the U.S. Dollar is certainly driving commodity prices, literally through the roof. It is no longer an imagination to see crude oil above $100 per barrel, and gold above $1,000 per ounce. It is actually unfolding in front of us and the expectation is that commodity prices are still on their way up for the foreseeable future. This news has to good for those ready to invest in commodities or commodity funds. But it is not good for the consumer who will be faced with having to pay higher prices. Higher prices will then mean higher inflation rates and that in turn will not be good for economic growth.

For the global investor, what is currently happening to the world’s largest economy is not good news. In fact it is scary, to put it mildly, as there is nothing the investor can do but watch and hope as the U.S. authorities do their best to turnaround a difficult economic situation. However, for some investors, the current situation does offer opportunity to make some money from a weakening U.S. Dollar and the escalating commodity prices.

For the global investor, it is certainly worth the while to monitor closely how the situation unfolds in these coming months. Hang in there and have success!