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Brian Tora’s Investment View

It hasn’t been getting any easier. In scenes reminiscent of 2008, market traders have experienced extreme volatility and have seen a bear market develop in as shorter time as I can recall since Black Monday 1987. Then, it took just a day for shares to fall the requisite 20 per cent. It took a little over a week on this occasion.

You can distil current concern into a simple question. Can Western governments achieve the cuts in expenditure necessary to reduce debt without tipping economies back into recession? This applies just as much in Europe as in the United States.

While not every country within the single-currency zone suffers the same degree of pressure, austerity is now on a number of agendas.

The worry is compounded by the fact that slower – or even negative – growth will result in a reduced tax take, making it even more difficult to service the accumulated debt. The tougher the measures taken, the harder it will be to generate the revenue needed to pay off borrowing inappropriately acquired during times of easy credit. As conundrums go, this looks as tricky as any.

Meanwhile, the list of nations being targeted by the market as vulnerable is growing in length – and even more by value. France is the latest country to be highlighted as in danger of losing a coveted AAA rating. But if America can, why shouldn’t they be in the firing line?

An interesting test of strength is being played out between governments and markets. So far no sensible gambler would bet on the outcome.
It does, of course, make for a tricky time for investors – and that means nearly all of us.

Through pension schemes and insurance policies, most of us are exposed to the vagaries of the market. Many of the readers of this esteemed journal will owe a fair chunk of their income to the performance of markets, so where we go from here is of importance to us all.

It is hard to get a clear signal. Both the leaders of the central banks in the US and here in the UK have stated that interest rates will remain low to help take pressure off industry and the personal sector. In the case of the Fed, a timeframe was mentioned. Mr Bernanke must be truly worried if he is prepared to commit to two years of low interest rates, particularly since he cannot be sure what will happen next month, let alone in 2013.

The fact, too, that we are in the midst of the holiday season cannot help.

AJP Taylor once remarked that World War 1 may never have taken place if the events that led to it had not occurred in late July, when all the important players were on holiday. Might things have turned out differently if all this angst was arising a month or two hence? Possibly, but I wouldn’t bet the farm on it.

So, we are where we are and probably the best advice available is to sit it out. Some traders, I feel sure, will be making hay in all this confusion and uncertainty. But for every gainer there will be a loser. And it is the end-game that should concern us most.

Perhaps we in the West are due our lost decade, as befell the Japanese, so that the consequences of our profligacy can be expunged from the record. If that is, indeed, the case, then we may already be a long way down this road.

Brian Tora is an associate with investment managers JM Finn & Co

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