DABERIAM XLII

August 2008

I have to admit, when I mentioned Russian sabre rattling last month, I had not anticipated the actual event happening so soon. Russia’s invasion of Georgia would appear to have been meticulously planned and only waiting for an appropriate occasion. The fascinating lesson from the whole exercise, however, was the muted response from the German Chancellor. She was clearly anxious not to offend Russia, conscious of the vulnerability of an “accident” to Germany’s energy supplies. The Russian lightning strike, and now withdrawal, further indicate the vulnerability of European energy supply as pipelines from the reserves around the Caspian Sea were over flown by Russian aircraft, although not damaged. This pipeline is currently out of action owing to it being sabotaged in Eastern Turkey. 

On the economic front, food and commodity prices would appear to have peaked as speculative liquidity has drained out of the various commodity markets. It seems that the new fashion for what used to be called ‘hot’ money is now to buy the structured investment vehicles that have wrought such havoc in the banking sector. In the short term, there is something of a silver lining in the events of the last few weeks - European energy policy may develop a more serious attitude towards supply and help the decision taking process that will enable the Nuclear programme to restart. The lack of energy security in Europe is probably the greatest threat to the European structure that we face. The power of the Misologists of the Green movement may just be beginning to wane. The other good news, the decline in commodity prices, is greatly reducing the Central Banks’ desire to raise interest rates which would certainly completely collapse the European economies. 

Global Economic Indicators

World Economic Growth	2007 (IMF Estimate)	4.90%	2006 (World Bank)	4.00%	2005 (World Bank)	3.60%
Base rates: 31 July 2008	USD	2.00%	EUR	4.25%	GBP	5.00%
MSCI World Equity Index	31/07/2008	280.137	31/12/2007	299.916	YTD %	-6.59%
Gold (PM London Fix $ per ounce)	31/07/2008	918.00	28/12/2007	833.75	YTD %	10.10%
Oil (WTI Crude $ per barrel)	31/07/2008	124.08	28/12/2007	96.01	YTD %	29.24%

On the global front, the US economy looks the strongest in the West going forward. Their imports are declining, exports rising and, apart from the now obvious problems in the finance and building sectors, the rest of the economy is looking far stronger than Europe. 

In Asia, the Chinese Government, once it is through the Olympics, will endeavour to reinvigorate the economy and get it back on track for a 10% growth rate. It has to be remembered that China’s policy is to add in excess of ten million jobs a year as it urbanises its agricultural population. 

The uncertainty and lack of direction from the US will continue until the new Administration settles in at the beginning of next year. It is worth remembering this is the most vulnerable time for the US from the point of view of some terrorist outrage. The deterioration in European economies and the pessimism is likely to continue to grow. The outlook is particularly bleak for those of us living in Britain, as our Socialist government, which has squandered the country’s resources over the last ten years, is now rudderless and bereft of any idea of what to do. 

While the above may sound pessimistic, I think one should draw some optimism from the fact we seem to be getting near the bottom of an economic downturn and the chances are that, looking a year ahead, one will be able to be more sanguine about the future, at lest outside Europe.

Damon de Laszlo 
August 2008