Inflation expectations and actual inflation around the world in developed and emerging markets are the highest it has been in decades. The fear of inflation is well founded when one considers the late 1970’s and early 1980’s when inflation got out of hand.  As with all economic events, no two events are ever exactly the same with the result that the rapid interest rate increases in the 1980’s, that subdued inflation may not be the required medicine in 2008. A significant increase in interest rates may just push the economy into a recession, at a time when actual inflation is still relatively low. Mr. Bernanke’s earlier remarks that inflation was indeed a bigger risk than a recession which led to a strengthening of the dollar and a reduction in oil led commodity prices (the main driver of current inflation), was negated by the Fed’s inaction on interest rates this week.  The markets reacted in a manner that could have been expected – oil and other commodities up, dollar down and stock market down!

Today is the last day of the second quarter and the first half year for 2008. This is a presidential election year when investors (voters) expect to be well treated – not quite so at this stage. The value of real estate continues to decline, virtually across the board, albeit at a slower rate with some increase in units purchased; the economy stubbornly refuses to fall into an official recession, but it sure feels like one; corporate profits are under pressure putting a damper on stock prices and increasing the risk associated with corporate bonds; the stock market is now flirting with an official bear market, even though investors in banking stocks and home builders feel more like they are in a depression and inflation led by a probable bubble in oil and other commodity prices round out all the gloom.

Investors face daunting choices at this stage:

1- Year Treasury’s are yielding 2.57% on an annual basis.

2 - Year A Municipal Bonds are yielding 2.73% on an annual basis.

2-Year A Corporate Bonds are yielding 4.72% on an annual basis.

Real Estate prices are projecting a decline in 2008 of between 15% and 20%

The stock market as measured by the Dow Jones Industrial Average, as of Friday is down 14.46% since January 1 2008.

On a brighter note the LJL SECURED HIGH YIELD INCOME FUND continues to deliver a 10%+ annualized yield to investors while continuing to improve the security of its loan portfolio through conservative valuations and a portfolio-loan-to-value of between 50% based upon appraised values and 57% based upon a 30-day sale broker provided price opinion.

The dollar declined to a two-week low against the euro and the yen after the Federal Reserve gave no indication it will start reversing the most aggressive series of cuts in two decades.

The greenback dropped for a second week as the Dow Jones Industrial Average headed for the worst June since the Great Depression and crude oil surged to a record. The European Central Bank is expected to raise interest rates by a quarter- percentage point on July 3, the same day a government report is forecast to show the U.S. lost jobs in June for a sixth month.

``It's a combination of less hawkishness than expected from the Fed and a fairly sharp breakdown in equities,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp in New York. ``That's a pretty toxic mix for the dollar.''

Previously the dollar advanced to a one-month high against the euro on June 13, four days after Fed Chairman Ben S. Bernanke said the risk of a ``substantial downturn'' had diminished and accelerating inflation ``would be destabilizing for growth.''

For the entire article from BLOOMBERG NEWS click here:

Sales of previously owned homes in the United States rose last month as prices continued to fall and more buyers were lured back into the troubled housing market, the National Association of Realtors said.

Sales rose 2.0 percent in May to an annual rate of 4.99 million units from the 4.89 million unit pace in April. That pace is 15.9 percent below the sales pace of a year earlier.

The median sales price fell 6.3 percent in the past year to $208,600, the fifth-largest annual price decline for records including both condominiums and single-family homes dating back to 1999.

The median sales price of single family homes fell 6.8 percent, while the median sales price for condominiums fell 2.1 percent in the past year.

Sales rose in three of the four regions of the country in May.Sales in the Northeast rose 4.6 percent and sales in the Midwest rose 5.5 percent. Sales in the West, where prices fell the hardest, rose 2.0 percent. Sales in the South, the country's largest region, fell 0.5 percent in May.

The increase in sales led to a decline in inventories, which fell 1.4 percent to 4.49 million units.

At the current sales pace, it would take 10.8 months to deplete the supply of unsold homes on the market, faster than April's 11.2 month pace.

On Wednesday, the government reported that sales of new homes tumbled for the sixth time in seven months in May while median prices kept plunging.

The Commerce Department said new homes were sold at a seasonally adjusted annual rate of 512,000 units in May, down 2.5 percent from the April level.

The median price of a new home sold last month fell to $231,000, down 5.7 percent from a year ago.

The report on new home activity in May followed reports Tuesday that showed record home price drops in April, showing that the nation's housing slump is not only deepening but also widening to include previously untouched parts of the country.

For the entire article from CNBC click here:

Eight months after they peaked, stocks dropped to the threshold of a bear market, another signal of the mounting challenges that lie ahead for the economy, government and investors.

Friday's 106.91-point drop left the Dow Jones Industrial Average at 11346.51, down 19.9% from its October record, after it had fallen as low as 11297.99 during the day. At the day's low the Dow was down 20.2% from October. Investors typically consider a decline of 20% or more the mark of a bear market.

It might just be a matter of time. The last bear market, which extended from January 2000 until October 2002 for the Dow, was accompanied by a mild recession and wrenching corporate-profit declines.

There have been nine declines of this size in all since the 1960s. Bear markets can be sparked by any number of problems -- inflated stock values, mounting inflation, rising interest rates or a recession. This time, the problems are unusually broad and varied.

Record prices for oil and other commodities are pushing inflation higher. U.S. economic growth is slumping to near-recession levels amid months of difficulties with housing and the availability of credit. A wide number of bedrock U.S. companies are facing fundamental troubles with their business models, among them banks, retailers, home builders, brokerage firms and auto makers.

It is all but impossible to predict how long a bear market will last, or how weak the economy might become. Of the nine bear markets since 1961, some have lasted only a few months, while one, the most recent one, dragged on for more than two years. A bear market starts when stocks begin what turns out to be a 20% decline. Its end is the bottom -- seen only in retrospect after stocks have recovered by 20%.

Since 1960, the average bear market has lasted about 14 months and has taken stocks down about 31% before they hit bottom, according to Ned Davis Research in Venice, Fla. The mildest bear market featured a 21% Dow decline in the early 1990s, and the worst, during the 1970s oil crisis, a 45% drop.

For the entire article from THE WALL STREET JOURNAL click here;

IN 2002 John Taylor, a well-known monetary theorist, gave a speech in honour of Milton Friedman, the great economist who died in 2006. Mr Taylor described how the low and stable inflation of the previous two decades emerged from a more disciplined monetary policy, inspired in part by Friedman’s analysis. “In the United States when the inflation rate approached 4% in 1968, the federal funds rate was about 5%. When the inflation rate approached 4% in 1989, the federal funds rate was about 10%, clearly a much larger response.” Once again, America’s inflation rate is at 4% but the fed funds rate is just 2%. With inflation high and interest rates low, many are worried that the lessons set out by Mr Taylor and by Mr Friedman before him are being ignored.

If policymakers have until recently seemed remarkably relaxed about higher inflation, that is because it reflects a jump in the cost of oil and food rather than a broad acceleration in prices. When commodity prices shoot higher, the standard policy response is to treat the resulting rise in inflation as a once-and-for-all shift in relative prices. An interest-rate increase big enough to squeeze inflation back down in short order would cause a needlessly large rise in unemployment. As long as expectations of future price changes are stable, policymakers can breathe easily. Firms and workers are unlikely to push other prices and wages higher, and so the surge in inflation will soon pass.

If an inflation psychology is returning, not all the rich world’s central bankers appear to be treating it with the same degree of fear. Only the European Central Bank has signalled that it will raise interest rates. Its American and British counterparts may be right in judging that inflation expectations will be attenuated by an economic slowdown, and flexible labour and product markets. If they are not, they run the risk of squandering the credibility their predecessors earned at such a high price.

For the entire article from THE ECONOMIST click here:

The world’s two largest economic blocs were both hit on Friday by signs of high inflation and weakening consumer sentiment, adding to the dilemmas faced by the Federal Reserve and the European Central Bank.

Fears that inflation in the eurozone would hit 4 per cent in June were stoked by preliminary data from Germany and Spain showing inflation at its highest level for 15 and 11 years respectively.

Signs that growth is already slowing in the eurozone also came yesterday morning when the European Commission reported a monthly drop in its sentiment index from 97.6 to 94.9 this month, the lowest since May 2005.

The level of the decline caught economists off guard, even though it came only four days after indices tracking the mood of European purchasing managers and German business showed wider-than-expected losses.

Marco Valli at UniCredit in Milan said the current level of the European sentiment index was equivalent to 0.3 per cent quarterly gross domestic product growth, down from 0.8 per cent growth from January to March.

“GDP is decelerating significantly below potential, with increasing signs that weakness is becoming broad based,” Mr Valli warned in a note to clients. “We think this is the start of a prolonged cyclical downturn.”

The ECB is still expected to raise interest rates by a quarter point to 4.25 per cent on Thursday – a move to fight inflation that will drag on growth.

The Fed is expected to hold fire on rates for longer, although there is an expectation still of higher rates in the autumn.

For the entire article from THE FINANCIAL TIMES click here:

From THE ECONOMIST:

 

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