You could be forgiven for experiencing a strong sense of dj vu as you look at the markets this year:a burst of optimism to start the year; then a spasm of panic as US money-printing runs out and Europe threatens to explode (again).
The same thing happened in 2010, and 2011.
So are we going to see the same again? And if so, what should you be doing with your money?
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2012 is looking familiar
The huge stock market rally from March 2009 ended a long time ago. We've been in a spiky sideways market since 2010, and it's been following a familiar pattern.
Investors enter the New Year filled with optimism. This year, they think, the crisis has to end. After all, central banks are on the case; economic data is perking up; Europe seems to be on the mend.
Then, come spring, they start to fret again. The data droops a little. Central banks stop talking about extra stimulus. The leaders of one European country or another declare that they've found that the previous government had spent a lot more money than they'd ever admitted, and now they have to clean up the mess.
Markets get a bit wobbly. Then they get really wobbly. Everyone starts talking about a eurozone meltdown again. And just as it looks like a crash is on the cards, the US prints more money, and Europe belatedly reaches a half-hearted deal to bail out whichever country is in trouble this time.
Governments want to inflate away their debts
This perhaps shouldn't come as a big surprise. We could have cleared up the 2008 crisis more rapidly if we'd been willing to accept a more brutal recession.
As Leigh Skene of Lombard Street Research pointed out recently: "1920-21 was the last time the officials of a major nation didn't try to fix a depression. It is also the last time a depression reversed into a boom in 18 months."
But we didn't take that route. We decided to bail out the world's debtors at the expense of savers. So now governments and central banks have been left walking a tightrope.
They are burdened with huge debts which they want to inflate away, along with the private debt holding their economies back. The only way to do this is to keep official interest rates below the level of inflation.
But they can't make this too obvious. Fund manager Jim Leaviss, writing on M&G's excellent bondvigilantes blog, asks what would happen if the Bank of England cancelled the £300bn-odd of gilts that it has already bought under quantitative easing (QE). In other words, what would happen if the Bank of England just wrote off the money owed to it by the Treasury?
It would get rid of a big chunk of gilts (alleviating fears that they might one day hit the market). And Britain's net debt-to-GDP ratio would slide (from about 63% to 41%). So what's to lose?
Leaviss has a point. QE has already been done. The act of writing off the debt would not in itself be inflationary. Any inflationary impact already took effect when the debt was bought with printed money.
The only real problem with Leaviss' idea is that it would bring the truth about QE so brazenly into the open, that any foreign investor in the UK with any sense would run a mile, and anyone holding sterling would dump it as fast as they could. That's what would be inflationary about it.
QE is a confidence trick. It works for as long as people believe it won't result in hyperinflation and the destruction of your currency. If you openly admit that you're only doing it so that you can pay off your government's debts with printed money, then that confidence will rapidly be shattered.
This need to maintain confidence is why the approach to QE remains quite fudged. The trouble is, in the meantime, both investors and the economy have grown to rely on an ongoing stream of QE to keep interest rates low. So when it looks as though it's about to run out, they panic.
It's a bit different this time
The big difference this year from 2010 and 2011 is that the US looks healthier than it did.
But that's a double-edged sword. If the US recovery is genuine, then more QE is unlikely. That means no more cheap dollars flooding the globe.
In the longer run, a strong US recovery would be good for global markets. But there's always the danger that tighter monetary policy (or at least, no more loosening of monetary policy) sends markets over the edge again.
On the other hand, if the US recovery has been over-stated, then there'll no doubt be more QE. But as I've mentioned already, it might be a while in coming. And in the meantime, markets will have nothing to do but get more and more worried as they watch a stream of increasingly negative data.
The other difference is that China is looking a lot more wobbly than it has done over the past few years. And if Spain really does become an issue for the eurozone, then that'll be a lot more disruptive than Greece ever was.
What does this mean for your money? The fact is, it shouldn't mean a huge amount. You shouldn't be shifting your money around every five minutes according to the market's mood swings. Given that the environment has been roughly the same for nearly three years now, your portfolio should be positioned to cope with it already.
As far as I'm concerned, if you've got some gold, a selection of solid dividend-paying blue chips or even corporate bonds that you're happy with, and selective exposure to other markets you like the look of (such as Japan), then you don't need to make big changes. I'd also largely avoid base commodities due to China slowing down.
If you do want to take more of a punt on the market turning to risk-off' mode, then betting on a stronger dollar looks like the best way to do it. One of the easiest ways is to use spreadbetting if you have a strong stomach for risk sign up for our free MoneyWeek Trader email to learn more.
This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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