Markets and the Days of Reckoning

If you are thinking about investing money over the coming months, be sure to do it slowly and regularly to take advantage of dollar (pound) cost averaging (if you don’t know what this is you might want to buy The Child Millionaire) and keep plenty of cash on the sidelines until after June.


Why June?


So far in 2011, the markets have been strangely resilient, even buoyant in the face of Middle East uprisings, bombing and civil war in Libya, Japan’s earthquake and tsunami, the recent Portuguese bailout, Ireland’s ongoing woes and further drops in US and UK house prices.


This is very, very strange and isn’t justified by the grim economic picture in the US, the UK, Japan and most of Europe. What this market irrationality suggests to me is that the Quantitative Easing (we had QE I and now QE II) money printing activities of the US Federal Reserve and artificially low interest rates in the US, Britain, the EU, Japan, Canada and elsewhere are the only thing keeping the markets and many Western economies from derailment.


It’s difficult to put a number on it but some of this QEII cash sloshing around in the system – the US Federal Reserve is pumping $60 billion a month into the economy – must be finding its way into global stock and commodity markets thus driving up the prices for everything from share prices to rice and oil.


QEII ends in June and nobody knows whether QEIII will follow. If it does then share and commodity prices could well continue to defy gravity and keep rising but if QEIII is scuppered then there may well be a huge correction in share and commodity prices. If the end of QE is coupled with ongoing high oil prices that send the US, UK and much of Europe into a double dip recession and there is a full blown Eurozone crisis or the US government fails to increase it’s borrowing limits, then all bets are off.


Perhaps when all of the cash is sucked out of global markets we will even revisit the March 2009 lows. If so then buy like a maniac with both hands and all the money you can muster. But until then keep lots of powder dry and only invest a little bit each month.


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