Global gains are bound to end in tears

SOMETHING has to give in global markets. Never in history have assets as disparate as gold, oil, shares and long-term interest rates all risen at the same time - at least not for such a sustained period.

But that is what has been happening lately, and the end result, if history is any guide, will be disaster for at least one set of investors.

Let's take one market at a time: Gold has hit fresh highs, apparently on fears of renewed international terrorism and the assumption that a rebounding American economy will stoke inflation, sending investors towards the traditional safe haven of bullion.

Oil topped $30 a barrel, back to where it stood before the Iraq war, and prices at the petrol pumps have broken through $2 a gallon in some states, a near-record level and one likely to cramp the consumer.

U.S. stock markets are at or near 17-month highs. The surge that began in March has been predicated on signs of a stirring of the economy. Certain market indices have leapt as much as 50% in anticipation of a revival in company profits.

Interest rates near 50-year lows and the injection of enormous liquidity into the US economy in the form of tax cuts and spending financed by debt have helped fuel the boom.

Some commentators have accused US central bank chairman Alan Greenspan of reflating the share bubble that burst with nasty consequences in 2000.

But long-term US interest rates have surged, largely due to stronger US economic numbers, the rising oil price and a vacillating US dollar.

You do not have to go back far to see what rising interest rates can do to Wall Street. The Dow Jones Industrial Average registered its biggest drop - 22% - about this time in 1987 when rates rebounded faster than anyone expected.

When rates rise, bonds become more attractive for investors and money migrates from stocks to fixed income.

Of all the ingredients, oil and interest rates present the greatest danger. One factor behind the oil price rise is tension between the US and Saudi Arabia on a range of issues, notably the funding of terrorism and alleged Saudi involvement in the attacks of September 11.

The International Monetary Fund did warn in March, before hostilities began with Iraq, that a protracted conflict and its effect on oil production could cause a global economic recession.

The fund was criticised at the time for being overly pessimistic, given the expectation that the Americans would thump the Iraqis in no time.

Things have changed for the worse since then and the question now is which market will crumble first.

Meanwhile, outrage over the £90 million of 'accumulated bonuses' awarded to New York Stock Exchange chairman Dick Grasso reached a climax last week, when the Securities and Exchange Commission chairman William Donaldson said he wanted to see how the exchange did its sums.

Donaldson was said to be angry at the size of the payment, which Grasso insisted was his because he had worked at the exchange for 37 years, but also because Grasso would be earning as much as £1.59 million a year under a new contract to run through 2007.

As the SEC regulates the NYSE, Grasso is technically 'under' Donaldson. And Donaldson, who preceded Grasso as chairman of the NYSE, earns just £94,870 a year as head of the SEC.

Donaldson, a former Marine and co-founder of the successful Wall Street firm Donaldson, Lufkin - widely admired for giving time and money to charitable causes - places great weight on the term 'public service'.

The best that Grasso, a schmoozer of the famous and tireless self-promoter, must hope for out of the SEC inquiry is a long lecture from Donaldson on greed.

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