Not withsatnding the comments from last week the FTSE rose again through the 5000 level to finish the week at 5128, a rise of 162 points for the week. So the support level mentioned last week of 4925 was respected. The resistance level of 5175 looks like it will be tested again.

It has been a week of mixed signals. Gold has reached new record highs, the US dollar is sinking against most currencies. Alcoa made a profit for the last quarter after shedding thousands of jobs plus a rise in the price of aluminum. Then Australia raised the base interest rate by 25 basis points which gave a boost to the US markets.  It is all illogical.

Banks in the US can borrow short term money from the FED at almost zero interest, and then lend it back to the FED (by buying 30 year bonds) at 4% interst.  How long can this shell game go on?  Governments around the world increased liquidity to ease the credit crisis, but did the banks lend it out again? No, instead they invested it where they could for a quick profit, hence a 50% increase in stock markets since March.  This is way ahead of the health of the companies these shares represent.

The US government has spent billions trying to prop up the housing market.  First they had to bail out Fanny Mae and Freddie Mac, then they have the First Home owners grant of $8,000 (about to expire in November), and to top it off the FHA (Federal Housing Administration) which insures mortgages with low down payments, is already in a loss position of $54 billion and rising.

The world is loosing faith in the “strong US dollar ” mantra that gets repeated regularly by the treasury. More talks are going on about creating a new reserve currency made up by a “basket of currencies”.  If this happens you can wave good bye to the current US dollar.

In John Mauldins letter this week he quotes from a study by Peter Bernholz at the University of Switzerland.  Bernholz analysed the 12 largest episodes of hyperinflation, all of which were caused by financing huge public deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government’s deficit exceed 40% of its expenditures.  The US is at this point now.  The only thing keeping the US going is that the US dollar is the “reserve currency” of choice.  But this can change quite quickly, then what?