The message from the markets is inflation, inflation, inflation

Wayne Arnold

• Last Updated: June 16. 2008 11:52PM UAE / June 16. 2008 7:52PM GMT

No surprise what the message this week from markets is: inflation, inflation, inflation.

Inflationary forces in the United States are being offset to some extent by the housing recession and slowing consumer spending, but Midwestern storms and rising utility bills could spell trouble.

Easing anxiety about a crisis at Lehman Brothers should help bring confidence back into the market somewhat.

More encouraging are concessionary comments on production from Saudi Arabia, what some call “the central bank of oil,” that are cooling the petroleum price pandemonium.

All eyes are now on Khursaniyah, Saudi Aramco’s newest field. Saudi Arabia now earns $1 billion a day slaking the world’s thirst for oil. Only $64,999,000,000,000 to go before all the world’s oil is gone, according to Morgan Stanley economist Stephen Jen.

Outside America, watch out: dollar pegs and growing economies make a dangerous brew.

Bankers here in the UAE are encouraged that policymakers at least know their problem is that they have no monetary policy other than that set by the Fed and see subsidies and price caps as temporary solutions at best.

Recognition of the problem will do little to quell the rising dissatisfaction among workers in the UAE who face diminishing real incomes due to the effects of inflation at 11 per cent. Could we face a long, hot summer?

In this environment, hard assets are key to surviving, so look for higher oil prices, higher gold prices and higher prices for real estate, particularly here in Abu Dhabi if EFG-Hermes is correct in its latest prediction.

This is not a very interesting strategy for Wall Street and its ilk, finding investments based on which will lose the least money.

Bankers who have grown fat and happy on selling sophisticated ways to leverage the once unstoppable rise of equities on the back of cheap money will now have to find new ways to make a living.

Some seem convinced that the Gulf is where the action is, even if just to help the increasingly affluent sheikhs spend their money.

warnold@thenational.ae