How worried should we be about the recent market falls?

In the two weeks I have just been away with no phone signal and no Wi-Fi I can honestly say that I didn't think about the stockmarket once. Not once. However, you won't be surprised to hear that I have been thinking about it pretty much non-stop since my flight from Lerwick landed and I saw the Sunday papers.

To me it looked immediately as if the last fortnight has been one of the more dramatic of the last seven years one that has laid bare some of the fallacies of the great global recovery and stockmarket boom. But that's not how everyone sees it.

The vast majority of the commentary (outside MoneyWeek!) suggests that the huge market falls (China is down 22% in four days) mark nothing more than a "healthy correction". If you are in for the long term, says more or less everyone, you have nothing to worry about. Buy on the dips and look forward to a prosperous future there is no global recession on the horizon and with no recession there can be no bear market.

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This is mostly nonsense. Firstly, you can have bear markets without recessions. It isn't low growth expectations that makes stockmarkets fall. It is stocks priced for high growth, suddenly bumping into the reality of low growth and possible deflation. Anyone who has ever read Russell Napier's great book on bear markets Anatomy of The Bear: Lessons from Wall Street's Four Great Bottoms (if you haven't, now is the time) will know that all the great bear markets have been caused by deflation anxiety taking hold.

Right now, slowing growth in China along with its currency devaluation is creating particularly intense deflation anxiety at a time, when, as Russell points out, US equities are more expensive than at any time on record bar 1929 and 1995-2000. But how can the outright deflation caused by lower Chinese prices be prevented (the cheaper its currency, the cheaper its products)?

That's a tough question for central banks some six years into super-loose monetary policy. If almost non-stop money printing can't create real inflation or even keep stockmarkets rising for ever, it is hard to see quite what will. If you want to take any lesson from the last few weeks, it should probably be this: given that central banks clearly can't solve the world's structural economic problems, don't invest as if they can.

So what do you do? Keep more cash than normal in case things get worse (Russell thinks that China will keep devaluing its currency and keep creating deflation if he is right, things will get a lot worse), and in the meantime, keep your eyes open for value.

There are some possibilities in this issue of the magazine: some absolute-return funds that might actually do what they say on the tin, and for a super-steady income fund see David Stevenson's column. And if you want to invest somewhere where there is real growth, you might look to eastern Europe.