Monday, September 17, 2007

Sale still on!

All the scenes of panic in the UK high street will have given the public a first-hand view of a bank run.

At the same time, there is a lot of debate about whether or not the US economy will fall into a recession and what this might mean for the rest of the world.

It is tempting to think it will get much much worse before it gets any better.

*************************

While the bad news is far from over, it would be premature at this stage to conclude that a US recession is inevitable.

But this is exactly what financial markets all over the world did in August.

Trillions of dollars were wiped off the value of financial assets on speculation that companies around the world would report weaker earnings and the world economy would stagnate.

Well it hasn't, yet. And whether it will be as bad as some would have us believe is still an open question.

What this experience should teach anyone who is actively investing their own money in the financial markets (myself included) is that the underlying strength of the global economy is what determines whether financial markets are likely to perform well or not, and not the other way around.

*************************

In other words, when stock markets sell off out of blind panic (as they did in August), but the underlying economic data remains strong, this should present an opportunity to any investor; rather like buying clothes on sale.

And the sale is still on! The same jumper that looked a bargain a few weeks ago is still a bargain today.

But at some point the current stock will go bad and won't be as good a bargain as before.

When a US recession becomes unavoidable, it will be time to shop elsewhere. Government bonds will be all the rage then.

Watch this space!

1 comment:

Seema said...

Thanks for writing this.