Markets over short periods can behave in odd and childish ways; evidenced currently by the hissy fit being thrown globally after Ben Bernanke gently reminded everyone that the Fed does not, self-evidently, intend to pump $85 Billion a month into markets indefinitely; shock horror – who’d have thought it?

The strangeness of the reaction is twofold. Firstly the clear message from Bernanke is that actions will be data driven; better data (economic performance) will mean less stimulus but this means the situation has improved, so that’s good isn’t it?

Secondly markets can’t have believed that the stimulus was indefinite, it knew it would have to slow down (taper) so why the tantrum over a certain outcome?

The silliness of markets and their overly emotional responses can be helpful to long term investors as it provides attractive prices when “the herd spits the dummy” but it can cause many to become wary of participating as reactions seem extreme and ill considered.

The rough truths of the situation going forward are these.

  1. Just as stabilisers are used to help people learn to ride a bike and their removal creates an initial fear of falling off, the reality is that they are no longer needed; QE tapering is a good thing and absolutely has to happen.
  2. The US is doing better and will continue to recover (energy independence will help enormously), the Fed will continue to ride shotgun to encourage greater employment and guard against deflation.
  3. Europe is profoundly troubled with a Union that is now acknowledged as flawed and a social welfare system which is unaffordable; much needs to change.
  4. Japan is literally going “all in” with Abenomics, if it becomes timid or reverses course it is certainly sunk; if it does everything to the max it still may be (see previous blog about Japan being the most indebted nation on earth).
  5. China is slowing and changing, no longer is it the cheapest place to make everything, it’s attempting to create a hybrid market/controlled economy with a movement of its population from impoverished agrarians to lower middle class city dwellers; it’s never been done before, it’s on a scale beyond boggling and it’s happening very quickly.
  6. The Financial system in the West has survived, it was for a time touch and go and there will be more fallout (banks and possibly even countries needing to restructure; Spain is an example) but the next big systemic issue is unlikely to be in this area, it will be somewhere else. (Of course the “where” is the unknown!)

We live in interesting times.

NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.