"Just when I thought I was out, they pull me back in," says Al Pacino's Michael Corleone character in Godfather III. But it could just as well apply to the stock markets this week. Just as equities were recovering from the early August crash and the bulls were feeling better, shares tanked again.
The panic was triggered by some truly awful figures from America. The Philadelphia Federal Reserve's business activity index, a key measure of US manufacturing confidence, came in way below forecasts. On its own, the 'Philly Fed' might not trigger such panic. But to jittery investors it became a further sign of a global recession on the way.
So money fled to perceived safe havens. Indeed, as demand for US Treasuries soared, the yield which moves in the opposite directionto price on a ten-year T-bond briefly dropped below 2% for the first time in more than 200 years.
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Of course, for regular MoneyWeek readers the market turmoil won't have been such a surprise. We've been drawing attention to the dangers facing the world economy for a while. In Monday's Money Morning, when we were still enjoying the brief market recovery, John Stepek warned that "nasty worries" lay ahead. Both Europe and America have too much debt and too little growth and any 'solution' to the problem is going to be painful.
"All across the Western world, politicians face tough choices. Whichever route they take, they are going to cause pain, and will therefore be unpopular. That leaves a wide-open goal for anyone in opposition to propose alternatives which sound attractive on the surface, but would just make things worse in the long run."
One policy put up by the politicians was stopping bank 'shorting' - selling shares in banks you don't hold with the aim of buying them back later. But this ban won't work, said Dominic Frisby in combative mood on Wednesday, any more than it did last time in 2008.
"The French, Spanish, Belgian and Italian authorities may well be congratulating themselves for [halting] short-selling bank shares, as the ban coincided with the bounce. But it doesn't change the facts any more than shooting the messenger changes the message. Too many Western banks have still not marked their bad commercial and residential real estate debt to market; they're still hiding other bad assets off the books; they're playing tricks with their tier one capital; they're overleveraged, and in some cases effectively bankrupt".
As banks have led the collapse in the past few days, Dominic was spot on. And looking further forward, he fears we could be heading for Japanese-style stock market stagnation. "A large part of Japan's problem is that it never really got to grips with the bad debt plaguing its banking sector. We don't appear to be learning from that, instead we are following the same route, creating our own zombie banks that will suck the life out of Western economies."
So Dominic's advice is to "hang on to your gold" which is hitting new highs amid the turmoil and keep your portfolio defensive. If you are tempted to invest in the yellow metal, Dominic's Frisby's latest gold report is still available. As well as looking at the best ways to buy gold, it's packed with his best tips on the miners to buy now. Find out more here.
If you want to learn a bit more about how short selling works and why banning it is daft watch MoneyWeek deputy editor Tim Bennett's latest video tutorial.
If you do own shares in these volatile times then make sure of one thing: that you've set your 'stop losses' right, says Bengt Saelensminde in The Right Side.
With markets swinging all over the place "many investors will have seen their stop loss orders triggered", says Bengt. That "locked in savage losses just a few hours before the market recovered". Bengt isn't saying you shouldn't use stops they force you to admit when you've picked the wrong stock. But in periods like this "you can easily get knocked out of positions just because the market's having a bad week".
So how do you avoid that happening? "First, assess the volatility of the stocks you own. Last week some stocks will have done much worse than others. High beta stocks are the really wild ones. If you've got a stock with a beta of two, you can expect it to fall twice the amount of the wider market."
Second, be prepared to adjust your stop orders with the market. If the whole market is falling then you should set a lower stop loss for your stock. There is no point selling just because a share gets "sucked into the market's downdraught. Stop losses are there to keep you from holding onto stocks long after their sell-by dates. They're not supposed to make you sell your stocks at the bottom of the market!"
It's not just the stock market that's feeling the pain at the moment. Our living standards are also taking a hit, says my colleague David Stevenson.
On Thursday, David looked at the 'Misery Index'. It's pretty easy to calculate: inflation + unemployment = misery. And this week it hit its highest point for over 17 years.
It's worse now than in the height of the financial crisis. That's because since then "we've had the worst of both worlds. Once the jobless rate reached just below 8%, it stubbornly refused to fall. In fact, the job scene looks pretty dire. Yesterday's figures from the Office for National Statistics showed UK unemployment back up at 7.9%, only just less than the highest reading for almost 15 years."
"Meanwhile, the Consumer Price Index (CPI) has climbed back to 4.4%, just below April's recent high and way above the official 2% target. Again, there's plenty to be depressed about. Like in clothing and footwear prices, for example, which saw their largest annual increase since records began in 1997."
And with growth in the UK, Europe and America looking flat, the "outlook is becoming gloomier".
Indeed, "stubborn inflation and low growth mean only one thing", blogs editor-in-chief Merryn Somerset Webb. "Stagflation". And "that's rubbish for savers. Inflation is slowly destroying the value of the nation's savings. That's worth remembering at the moment if you are suffering from empty wallet syndrome and wondering exactly who to blame."
This means inflation, not austerity measures, is the real culprit for the "rising financial pain being felt by the average family. If you are a 20% taxpayer you need an account paying 5.5% to make a real return based on the CPI. If you are a 40%-tax payer you need 7.3%." The trouble is, it's hard to find either. But read her blog: Merryn has an idea
No wonder the subject attracted a lot of interest and comment from readers. Lemus noted that for many people interest rates are actually even higher. "The CPI is 4.4% and the RPI is 5% for the average person, but the real impact depends on how money is spent. If you spend a lot of money on your home your personal inflation could be 8% or higher." As a result he favours investing in defensive stocks. "Amongst other attributes, these companies, and the people operating them, are successful and have been around a long time to prove it. The government does not have a track record like this." We couldn't agree more.
Stephen agrees that it is difficult to find inflation-busting investments. He suggests bypassing the traditional banking system and opting for peer-to-peer lending. "You can get a quite decent inflation beating rate of return at a very small risk, especially if you stick to those with good credit ratings."
Thank for these comments and if you'd like your say, just click here.
And finally, here's Merryn again wondering if we're too bearish on house prices. I'll leave you to work out the answer on that!
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Have a great weekend!
John Stepek
Tim Bennett
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