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In the space of a year, investors have gone from backslapping to nervously rubbing sweaty palms. Tumbling equity prices and rising bond yields are obvious signs of fear. But the culture of caution is spreading elsewhere. Money is pouring into that traditional safe haven, gold, with exchange traded funds enjoying record inflows. Meanwhile, prices for industrial metals such as copper and even platinum have dropped. Oil plunged by more than $9 a barrel at one point on Tuesday. In Merrill Lynch’s latest fund managers survey, most respondents said they were overweight in cash. Six out of 10 said a global recession had already started or would do so within a year.

Weakness in oil and industrial metals may reflect some switching to cover trading positions in volatile equity markets. In oil, demand destruction in the developed world is not enough fully to offset demand growth elsewhere – for now. Still, oil is clearly a big headwind. Freight rates, for example, while elevated, look much less impressive when adjusted for the rising cost of fuel.

Perhaps the biggest concern, however, is a growing reliance on government to save the day. The US Treasury department this week had to stand behind homeowners. Markets took fright on Tuesday when Ben Bernanke, chairman of the Federal Reserve, sounded simultaneously bearish on growth and hawkish on inflation, the latter having soared in June. Faced with this policy conundrum and a pulverised banking sector, the Fed has little room to act.

Worse, with foreigners holding significant amounts of US debt, the world’s largest economy relies on loose monetary policy elsewhere. But with inflation gathering steam, Asian central banks, in particular, will be raising rates. This might help cool commodities, but could hammer overstretched US consumers as financing costs rise further, regardless of Fed action. Hunker down.

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