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September issue

Finding something interesting to write about during the dog days of summer is often something of a challenge. Not this year, though. With news flowing thick and fast and markets gyrating widely, commentators like me have been spoilt for choice. Unfortunately, much of the comment has been of a bearish nature but markets were feeling that little bit calmer by the middle of last week.

Two swallows do not a summer make, as the saying goes, but there is a tad less panic around at present. Perhaps it is the prospect of regime change in Libya, with a resumption of oil supplies to Europe. More likely it is hope that the meeting of central bankers in Jackson Hole will reveal further plans to stimulate the floundering economies of the West. We may know more by the time you read this but I doubt much of significance will have emerged.

Meanwhile, the end of the holiday season moves ever closer, meaning traders and politicians will be spending more time at their desks.

Why do I find this a slightly discouraging prospect? For one thing, any resumption of the market slide or a return to extreme volatility will no longer be excused by the thinness of markets. And the presence of the policymakers may do little more than emphasise their lack of power and resolve in these difficult times.

September, rather like October, can be a difficult month – perhaps for the very reason that investors return from their summer breaks revitalised and prepared to take a fresh view of their portfolios. There can also be a degree of catch-up by governments after the summer recess, so I am not expecting an easy ride this month.

That is not to say that I am pessimistic but I suspect markets will be buffeted by a continuing flow of news that serves to underscore the dangers ahead.

My money still rests on continued above-trend inflation as the way out of the debt crisis in the developed world. In this way the value of the debt is devalued, while whole populations suffer a discreet cut in living standards, providing the austerity needed but without the blame being levelled squarely on countries’ leaders.
This outcome should not be bad for equity markets but bonds could find themselves in trouble.

Such is the current unease with which investors are plagued that bonds have been in demand as a safe haven against the slings and arrows of uncertain economic fortunes. Sub-inflationary returns from bonds will not be tolerated indefinitely, though, so either inflation – and probably economic growth – recedes or bond yields will rise. Time will tell but you know where my bet is placed.

Of course, all this uncertainty has found a champion in gold, soaring away to close to $2,000 an ounce. Interestingly, though, gold has not proved the long-term hedge many believe it represents.

While the price has advanced in inflation-adjusted terms since the start of the new millennium, it is, in fact, little different in real terms to the level at the beginning of the 1970s. And compared with the heights achieved at the time of the Iran/Iraq war as the 1980s began, it has delivered miserable value. Long-term investors should take note.

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

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