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THE ANSWER IS BLOWIN' IN THE WIND
By John Newsome on 6th September 2010


Wise words from Bob Dylan. While I'm hardly an expert on 1960s counterculture, he meant (I think) that the answers are often there but, you must have the wisdom to notice them. It's akin to reading between the lines rather than what is written on them. Investing can be similar. It is all too easy to be bombarded with information that, in reality, obscures your view of the main event and distracts you from the few things that really matter.


Take inflation, for example. Many commentators tell us that as the economy is not exactly firing on all cylinders, there's not much to worry about. Even the governor of the Bank of England has been cheerleading this particular point. Yet, inflation hasn't gone away. In fact, after many years of annual inflation targeting (usually around the 2% level), some central bankers have floated the possibility of increasing it to, say, 4%.


Mmmm ….. what should we infer from that? Perhaps, central bankers and their political masters are a) so clever they can control these numbers to the requisite degree or b) they recognise the situation is so dire, the only way out of it is actively to create inflation and therefore reduce the real value of sovereign liabilities? Anyone tempted to answer a) should pause for further reflection and then just write b).


Then there's how quickly the rate of UK GDP growth can recover to former levels. Leaving aside that the composition of GDP statistics offers ample room for creativity, what levels should we be looking at? Post bubble GDP or easy credit fuelled property boom era GDP? Surprisingly, plenty of people are expecting the latter.


Now, I am aware that most UK citizens believe that when Moses dragged those words of wisdom down from the mountain, they not only included 'house prices shalt rise forever' but were actually carved on granite worktops. Yet, with government spending about to be hacked, interest rates only going one way and little chance of unemployment falling markedly, we ask how likely is it that bubble era GDP growth can be recaptured?


Winston Churchill said "Men occasionally stumble over the truth but most of them pick themselves up and hurry off as if nothing ever happened". With that in mind, the explosion of sovereign debt in the developed world couldn't lead to a major country defaulting on its obligations, could it? Of course not; The Titanic was unsinkable, WWI was the war to end all wars and contrary to what my wife says, I barely know who Girls Aloud are.

 

John Newsome can be contacted on:
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