It has been a dreadful start to the year for the FTSE 100 with a drop of over 18% until last week’s rally. There was a tangible sense of desperation in the relief that at last there had been some positive signs. Some commentators seemed to get quite excited at the 10% or even 20% rises in certain bank shares both here and in the US – however, after a few seconds of reflection, some at least realised that this took those companies from being penny shares to just being companies worth a few more pennies. 

I would be delighted to announce that this was in fact the end of the bear market,  but the reality is more likely to be that it is going to be the start of a pattern which, although hopefully ending up higher than where we started, will mean we are going to see some volatile times. Whilst these may be encouraging and certainly better than the current torpor, they are more likely to end in depressing pull backs. For some previous examples we only have to look back to the recent history of the Japanese indices and I have added a slide below showing the S&P index in the 1930’s as well.  

The good news for that index was that there was more positive than negative. Most investors though would have been feeling somewhat sea-sick whilst having to suffer that volatility. The bad news was that it was followed by the start of the Second World War. Now whilst I am neither advocating nor predicting a global conflagration quite yet, it can certainly be argued that it was the determined expenditure of the war economies that helped to pull the US economy out of the depression. 

We should get used to these gyrations, as we are now likely to be in for an extended period of sharp rallies and fall backs – but within the context of a bear market. All the more reason therefore to ensure that you are well diversified into other asset classes that won’t suffer the nausea of the switchback ride of the equity markets. 

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So Quantitative Easing has begun formally. More money is going into the system, but as yet this will achieve nothing unless it starts to ease the log jam of bank lending. It is to be hoped that it will succeed but I will be unconvinced until we begin to see companies starting to see letters of credit being issued again and new facilities being offered in any scale. 

Perhaps it would be timely for the government to meet Bo Lundgren, the head of Sweden’s debt office who played a key role in resolving that country’s banking crisis. He has been invited to the US to explain how the Swedes got out of their banking crisis in the early 1990’s. The respected economist who has been illuminating many of the rocks and reefs in this crisis, Nouriel Roubini, recently commented “We are all Swedes now” on the basis that national funds are being deployed to prop up the banks. The key issue is not just the monetary support of the banks, which to a great extent has already been done, and it is not even whether the money is being applied – it is how it is being used. The key issue then is making sure that the funds are being applied to the right areas and not just being left to keep the propped up banks secure. 

What I find fascinating is the clarity of thought from the Swedes as opposed to our somewhat more muddied or even muddled approach of moving in piecemeal. From the slightly patronising view of the Swedes a year ago I think there is now a real appreciation that they, albeit on a smaller scale, got things sorted and recovered in good order and good time. 

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Director