To my mind the stage is being set for an October crash on Wall Street despite the proximity of the US presidential election. The ongoing financial crisis with the likelihood of a series of US bank failures, the collapsing US housing market and the knock on effect on consumer spending will result in a climactic capitulation.
It is remarkable, not to say unbelievable how well the Dow Jones and FTSE indices have kept up over the past year. The rumour in London last week was that George Soros is shorting the FTSE. It might be his best trade since pushing the pound out of the ERM in late 1992. That a serious downturn is coming in the world economy can hardly be doubted. High energy prices have turned a real estate crunch into a global slowdown, and with the banks already in trouble this could get a lot worse. Shipping reports point to a severe economic contraction in 12-18 months time and are usually an accurate leading indicator.
Dr Marc Faber, who was interviewed on Bloomberg TV last week, says he has noted a downturn in economic activity in every country during his worldwide travels over the past two months. China in particular looks vulnerable to an economic collapse after the Olympics and credit ratings have turned sharply negative. But I wonder if Dr Faber has visited Russia or the Gulf States recently. In England this week the economic slowdown, especially in housing is obvious. However, a couple of weeks ago in Russia I was amazed by the prosperity and obvious progress. You get exactly the same buzz when stepping off a plane in Dubai or Abu Dhabi.
In his Bloomberg interview Dr Faber alluded to his view that a global economic downturn will hit commodity prices and bring the boom cities of the Gulf hurtling down to earth. But in the same interview he also managed to propound the argument that makes this most unlikely: namely that the world is suffering a real shortage of oil and that will keep prices stubbornly high in a recession. You really can not have it both ways. If a global recession dashes oil prices below $10 as we saw in 1999 during the Asian Financial Crisis then the Middle East boom will be short indeed. But if oil prices stay in a high range there is little reason for immediate concern.
Surely we ought to remember that not much more than a year ago oil prices of $50 a barrel seemed excessive and ample to sustain the boom in the oil producing countries. Should we be worried if prices that topped $147 a few weeks ago moderate to $120 or even as low as $90 as Lehman Brothers suggested in a note last week? I think it is far too early to talk of gloom and doom scenarios for the Middle East. The boom is funding a programme of $1.3 trillion (Dh4.7trn) in infrastructure investment, and governments are highly unlikely to cut back greatly on this transformation of local economies. Indeed, with every passing day domestic spending looks a wise investment while pouring money into global financial institutions, for example, has so far been a big loser.
Aside from oil money the other major driver in the Gulf States is the loose monetary policy of the Fed and its low interest rates which are turbo-charging local growth rates. There is no sign of the US putting interest rates up. In fact, any reasonable analysis suggests a long period of low interest rates. Again this just has to be brilliant for the Gulf economies in the short-term, if risky over a long period. Moreover, if as I expect the US capital markets to have a meltdown this autumn then interest rates will be cut once more. The Fed funds rate could fall by 50 per cent from two to one per cent, giving a further stimulus to the dollar-pegged economies of the Gulf.
Now there is always a point at which economic booms go too far. The US and UK housing markets, the Internet bubble, history is full of examples. In the 1970s Gulf States enjoyed a seven year boom from the oil price hike of 1973 up to the Iranian revolution and just beyond.
Undoubtedly the present boom in the Middle East will undergo a correction but that does not mean forecasters should be jumping the gun. If you predict anything long enough it will eventually happen. So don’t be too alarmed by doom and gloom predictions for the Gulf. Other countries have far more immediate problems with their stock markets still far too highly valued for this stage of the economic cycle, and a worsening of their economies in prospect not a magic recovery.