42% of the world’s population are now living with double digit inflation. But on Thursday falling stock markets overwhelmed such stark ‘disco era’ numbers. On Wednesday night rating agency Fitch had downgraded (cut) the credit rating of GM and Chyrsler to B minus. This is six full notches or ticks below what is called ‘investment grade’. Once a companies rating falls below investment grade many fund managers are not permitted to invest.

Then another US company called Progressive Moulder Products filed for Chapter 11 (which is bankruptcy but with protection from your creditors). The market got the 2 stories mixed up and began to head south! And then oil spiked to $140 and we had Goldman Sach’s downgrading the U.S. Banks (singling out Citi and Merrill Lynch in particular) two days before half year end, which most likely has aggravated the selling pressure.

But price action does not lie, and tells you all you need to know about sentiment. What yesterday’s prices told me is that sentiment is shattered. As I have said before, this market cannot rally without leadership from financials. And it is the banking sector’s continuing lack of transparency about the true state of their balance sheet (partially because they don’t seem to know) which is the markets’ Achilles Heel.

Anecdotal Evidence
Nucor (largest U.S. steel producer) CEO Dan DiMicco said that the global credit crisis will slow construction and U.S. economic growth at least through 2009, “After that, who knows?” DiMicco said. “There are 2 camps; one saying we’re in a recession, the other saying we’re getting close to a recession. You don’t hear anyone saying we’re headed toward a recovery”. Good to see I don’t have the copyright on doom and gloom!

Oil : It’s All The Fault Of Those Evil Speculators
The U.S. Congress is looking for a culprit for the ever rising oil price! And it’s no surprise that they are targeting “speculators” as the convenient fall guy.. It’s election year and blaming the financial world’s equivalent of Osama bin Laden meets Moriarty is sound bite Fox News friendly stuff. The upshot may be more regulation of oil futures markets, which of course will just drive them offshore.

Sadly the surge in oil prices can more sanely be explained by basic economic factors such as limited growth in supplies, lack of refining capacity, a weakening Dollar, a leap in global demand and a string of production disruptions. Production has stagnated in Russia and Venezuela and is plunging in Mexico. And Nigeria is producing a lot less oil because of attacks in the Niger Delta. The market is tight and there is a shortage psychology: i.e. the market is bidding up the price of oil because of a deep-seated fear that future growth in demand will keep outpacing future growth in supply.

Data on the Radar:
German CPI looks set to “surprise” on the upside (when they get round to adding all the Lander numbers together on their Federal abacus). So we may see a print for Eurozone inflation at a nasty 3.9% on Monday then. Ahem, but isn’t that double the ECB’s upper target rate. Mmm, well yes. Belgium CPI came in at 5.8% yesterday (a level not seen since 1984). And that country’s Fortis Bank was in the news yesterday in all the wrong sorts of ways. Their CEO sounded about as convincing as Corporal Jones from Dad’s Army (“don’t panic, don’t panic”) when he broke a golden rule of banking in mentioning the S word (solvency).

Equities: Amid the Carnage
Amid the train wreck of the credit crunch someone is going to pull off a bold deal that in 5 years will look like a fantastic piece of bargain basement hunting. For the Mole, the players to watch are cash rich Spanish predator Banco Santander and the UK’s Lloyd’s TSB (who may just be about to buy Dresdner Bank from Allianz on the cheap).

The WSJ reports that the Fed is moving to loosen the rules that restrict Private Equity firms from investing in banks, just as we move from worrying about liquidity to fear of insolvency and another Bear Sterns!

There’s whispers of a rights issue from Deutsche Bank (nice timing boys) and Barclays may need anther £9 billion in capital according to Citibank. I know what you are thinking! Yes, pots & kettles come to mind, and there does seem to be a bit of a spiral of competitive downgrades of each other going on!

The Chinese market is down 6.5% this morning btw!

It’s half year end. The equity futures markets tried to rally early doors but are now on the slide again. Moles wouldn’t touch a stock on the buy side ‘til Tuesday. It’s all about risk aversion and conservation of your capital.

Moles buy bonds and wear diamonds.