There seems to be a growing consensus that this year’s recovery in the markets must be due for some kind of correction. This is partly due to a sense that all things come to an end and that, in this year in particular that truth must be more true than usual. But no one seems to understand the mechanics of the predicted market correction. The quantitative easing (QE) money that’s sloshing around isn’t going to be taken back by governments all of a sudden. The liquidity is going to be there but somehow there’s going to be a loss of confidence. It looks as if there’s going to be a sudden rush to liquidate investments and hold cash instead. This would mean a lot of people losing heavily, which would, of course, help reduce the risk of inflation. However, it would also negate one of the main purposes of the QE programme and confidence would take a lot longer to return than it did at the start of 2009.

Mr Darling and others have been warning about new asset bubbles forming but there don’t seem to have been a lot of clever ideas about how to get around the problem. One way would be to have another go at improving capital gains taxes so, for instance, these could be much more favourable to the small businesses and property owners than to other kinds of investors. To begin with this would only be a signal of the way the government wants to go and there would need to be a long-term commitment to fostering this kind of ‘main street’ business.

However, I’m not sure, with all this money sloshing around in the world’s financial centres, if there is a way of stopping some kind of 2nd correction. This puts investors in a bind. If the markets are going to correct, the logical thing is for every investor to pull back on all fronts – just the step that’s designed to make the problem as bad as it could be. The responsible, public-spirited investor would say ‘well, I always knew the recovery couldn’t be this good so I’ll take some losses on the chin.’ Not very likely, I think.

Some may take comfort from the fact that the stock markets are still lower than they were before the credit crunch. Equities in developed countries are down slightly more than 20 per cent since the beginning of 2008 even after the whopping increases of 2009. Unfortunately, there’s no reason why things should get back to how they were before. The correction might happen after the stock markets have recovered to January 2008’s levels, but it probably won’t wait long enough.

So which investments are going to turn out to be the best ones. Probably those that produce any kind of income that can be counted on, however small, deposit accounts, bonds with good ratings, those shares with better dividends but not gold. Things probably won’t get dire enough for gold’s status as the ultimate safe haven to come into play.

=======================================================

As I was writing this gloomy outlook I was prompted to have a look at my SIPP online and I noticed that an exchange traded fund I hold was down 30%. This ETF invests in Brazilian stocks and I can’t see why this big drop should occur. It looks as if there really was a collapse in the bid prices on the stock exchange yesterday afternoon but no corresponding problems with the Brazilian stock index or the value of the Real. Strange and scary and presumably some kind of glitch, which will be righted on Monday morning.

=========================================================

Great news that Lloyds and RBS have been told that their senior staff can’t have cash bonuses. There seems to be a trend developing of the argument that different professions will leave their posts in droves if they don’t get the right pay and incentives. This argument has already been made in respect of MPs and investment bankers and now it’s being applied to barristers who take legal aid cases. This argument seems to fly in the face of the current state of affairs where opportunities to switch careers or employers are thin on the ground.

=========================================================

At times this week has looked as if it might be a tipping point for politicians’ commitment to fighting in Afghanistan but Labour and the Conservative Party seem to be holding firm.

The NATO allies seem to have reached a stalemate on three fronts, with President Karzai, the Taliban and with one another. It looks as if neither the Prime Minister nor, more importantly, President Obama can announce any significant increase in troops being deployed without some more commitment from other NATO members.

Where this will leave British policy by the next election is unclear.

The only ground where some change seems to be taking effect is state of mind of muslims. Little by little, the terrorists and insurgents seem to be fracturing their own constituency. The potential for holy war drawing on some sympathy from millions of muslims is seeping away. Psychologically and spiritually, it looks as it’s becoming easier to ignore the claims - if not the threats - of the holy warriors, especially in Pakistan. NOt that the 'al Qaeda' era isn't going to leave plenty of mental scars in the lives of many muslims.

===========================================================

I’ve read one good book since last posting; ‘The Maze of Cadiz’ by Aly Monroe. Set where you’d expect in 1944, it’s about a member of the secret service on his first assignment, looking into the suspicious death of his predecessor. The hero is just a little flat and in a couple of places I struggled understanding the dialogue but the story has a good pace and leads you on.

I had a walk from Hambledon to Chiddingfold in the middle of the week and got caught in a short, sharp downpour towards the end. The walk included a stretch where you can see Blackdown in one direction and Leith Hill in the other (with dark clouds above both).