The voting is over, the result is in and by an overwhelming majority no one has the foggiest idea about what actually comes next, which is a small vote for sanity as those who profess to “know” are due a good “shipwrecking on the laughter of the gods”.

 There have however been some excellent ruminations. In the red corner the supporters of the end of the world include Robert Prechter of Elliott Wave fame (www.elliottwave.com) whose targets I wont trouble you with for fear of apoplexy (at best!). He is also one of the founders of the study of Socionomics of which more anon. For the rabidly bearish I can also recommend the Daily Reckoning (www.dailyreckoning.com) writ large by Bill Bonner who is both plausible and terrifying at the same time.

 In the blue corner the doyen of value investors and sometime Yorkshire man Jeremy Grantham at GMO (www.gmo.com) is a steady buyer of equities, but admits that the curse of the value manager is to be too early. My good friend David Fuller (www.fullermoney.com) is also siding with the bulls but would be a lot happier if a touch of confidence returned to the market; after all, as he points out to the battered and bruised investors of the class of 2008, “bear markets don’t last forever”.

 The mega bears, of course, see little hope, other than a rally in an ongoing downward spiral, whilst the bulls admit to the possibility of more downside before the next bull market takes hold. Not surprising, I suppose, given the diametrically opposed views and the extreme volatility that we have been getting used to, but does any of this help us mere mortals to invest our money with any confidence?

 The only spark comes from the universally held opinion (ex the mega bears who have eyes only for gold) that investment grade corporate bonds are a steal; certainly relative to government issues where yields are at decade lows. Historically corporates tend to lead equity markets on average by about six months but in today’s volatile market place six days might do it! In fact US corporate bond yields peaked at the very end of October and the S&P 500 bottomed in mid November so we may have had the signal already!

 As ever there is a caveat…or two. All bond yields have done is to retrace the spike bought on by the October downdraught when it was “sell everything and buy T-bills”. So in effect the gun has been reloaded awaiting the next panic attack. In the meantime in thin holiday markets the indices are trying to rally and the bulls will be hoping for the momentum to carry over into 2009.

 The second caveat is the worsening state of world “diplomacy” if it can be called that. The basis of Socionomics as preached by Prechter is that social mood precedes social and economic events. Simply put we don’t feel bad because we are in a bear market it’s the other way around! We experience a bear market because we are in a bad mood. Same with wars and conflict. Social mood turns ugly and the ammunition starts flying around. Now you can take this theory or leave it as far as I am concerned because I know how painful it is giving up sacred cows but there is no doubt that, increasingly, the world is becoming a very unfriendly place.

 Gaza is on the brink of catastrophe. Neither side is prepared to give an inch and never has. The 1948 boundary demarcations were anathema to Israelis and Palestinians alike and no amount of diplomacy will get them to see it differently. It’s been a problem for 60 years and isn’t going away. India and Pakistan are posturing towards conflict and South America is reverting to true bandit territory. In parts of Mexico over 90% of the police force is in the pay of the drug cartels. A senior ranking officer in the President’s security council was recently arrested for taking bribes (allegedly $100,000 per month) to keep the cartels posted on Calderon’s movements; supposedly so they could keep out of his way and not attract police attention to their illegal activities.

 Ecuador has reneged on its foreign debt and is broke; the government is raiding the social security fund (“social security” there’s a euphemism…) but the writing is on the wall. The rapid decline in the oil price has been the significant factor and this is causing pain and angst to many bigger fish including Venezuela and Russia, not to mention the Middle East “families”. With no sign of any uptick in the oil price (and many of the oil exporters need the price to double from here to make their budgets balance) social upheaval will inevitably follow.

 So before you reach for the razor blades, the rational response to the markets’ capitulation in 2008 is to accumulate things that look cheap, which covers pretty much everything if you have a reasonable time horizon! I just wish I could tell you how long that period of time needs to be! Happy New Year!

Just a small government hand out would do nicely. After all the banks have had largesse pored on them one way or another and now car manufacturers and even hedge funds are getting into the line up. But is this benefiting the average “Joe”? Well some mortgage rates have come down but as with the falling crude oil price what you pay at the pump hasn’t quite matched up. In January crude was $110 a barrel so at $2 to the pound as it was then that’s the equivalent of £55. Today with crude at $40 and sterling at $1.50 that makes it £30 a barrel a fall of 45% in sterling terms. Back in January the average pump price for petrol was 110p; today 90p, a fall of 18%. I am sure there is a logical explanation…please let me know unless you work for an oil company.

In fairness to the banks (not a phrase you hear often these days) mortgage rates for those lucky enough to be on trackers have tracked Bank of England rates reasonably well. For those on fixed our sympathies, but in future remember that it is never safe to make assumptions particularly about interest rates. The “top” in government bonds has been called every month since the middle of last year and yields are still falling. The UK 10 year gilt yield is getting preciously close to 3% and with spreads on investment grade corporate paper looking increasingly attractive the whole world is talking about the only trade in town. Sell governments and buy corporate bonds.

Well it hasn’t worked yet but as fund managers are wont to remind us they are never wrong just early! Long Term Capital Management (LTCM) believed they could never be wrong betting against interest rate spreads but proved spectacularly that in some cases timing is everything. With deflation the number one enemy at the Federal Reserve government yields could continue to fall. No one is quite sure whether or how the huge “support” operation is going to work. In fact neither it would seem does the government. The TARP pool has had at least three changes of direction; the latest being to fund the loans to General Motors and Chrysler. In this environment safety is still at a premium and government paper is still in much demand.

The purveyors of corporate bonds say that the Treasury and Gilt markets will be swamped with new issuance but given where cash rates are, government bonds are still attractive to those of a nervous disposition, i.e. those who used to believe that bank deposits and money market funds were safe. So 10 year yields at 2% (or below if you have a suspicion we are following the Japanese example) would give a mighty attractive return. But Economics 101 says that a “great inflation” is coming as the Fed’s printing presses glow hot; quite possibly but not for a while yet. Unemployment is rising rapidly around the globe, GDP is falling and retail spending would have ground to a halt had it not been for Christmas. Even so, to get people in the shops, and parting with cash, has meant the New Year sales starting early and with Woolies and MFI closing down the prospects for 2009 look bleak. House prices continue to fall and motor dealers are “giving cars away”. Inflation? Show me!

 At this “festive” time of year we pundits like to look back on the year that’s gone and ruminate about the one to come. Not that the market cares for calendar years or any other marker in the sand and never has it been so hard to divine the tea leaves, so it is tempting not to try; in fact knowing that we know nothing about tomorrow is getting to be strangely comforting.

Even looking back is an experience that almost defies belief. There are unfortunate folk who used to work at Bear Stearns, Lehman Bros and a whole raft of other financial institutions who are still shaking their heads and we feel for them deeply as many were innocent bystanders. Some of course were not but it is difficult, and in the short term pointless, to point the accusing finger, but there will be a day of reckoning and the Book of Revelations will seem like a fairy story for a number of the heroically greedy. The tech bubble in 2000 threw up some guilty parties and this time around we have the mother of all Ponzi schemes as your starter for ten; there will be more revelations…and worse to come.

The “prize” for drawing the shortest straw in 2008 has to go to Barack Obama. GW is positively ecstatic to be on his way out. After his trip to Iraq though he may want to consider some further “soul” searching – not of the size 10 variety – to contemplate the mistakes he made during his presidency and how he might have achieved some better marks. The President Elect has not only the biggest financial catastrophe to deal with, but there is still Iraq, Iran, Afghanistan and Pakistan and we haven’t even got started yet! To the south Mexico is disintegrating as the drug cartels take over and Ecuador has defaulted on its government debt (to be followed shortly by Argentina, Venezuela et al). In China the peasants are revolting and the Russians have become born again colonists.

Even amongst his “friends” in Europe he will find much discord and disharmony. He may want to be firm with the Russians but as the Germans rely on them for gas supplies support from the EU will consist of a Kirkcaldy kiss from Gordon and an autographed copy of “I am Napoleon” by N. Sarkozy. Not a lot of help in other words. Europe of course has its own problems which look very much like the American ones except they are denominated in euros, which brings us to the $64,000 question. Back in the ‘50s there was a game show by that name (yes I do remember it!) and people struggled to understand how anyone could possibly spend that amount of money. How times change; even a million doesn’t buy you much these days.

The question is, “Are you happy with paper dollars, euros, yen or pounds?” Central banks have ridden to the rescue of some major global banks and the mantra “too big to fail” applies to almost any financial institution (ex Lehman’s which was arguably “the” mistake of 2008) so the security of ones deposit seems to be, well, “secure”. Doesn’t it?

Well what else are the Central banks up to and the Federal Reserve in particular? They are printing money. Isn’t that their job? Of course we all like a crisp new tenner but they are adding new ones to the old stuff; increasing the money supply in the vernacular. Text book economics tells us that this is “bad” as more paper means the value of the “pound in your pocket” goes down so you have to use more of them to by the same stuff as you did before ie you get inflation. 

In Zimbabwe this has worked to a tee. The Governor of the Bank of Zimbabwe, one Gideon Gono – believe me that is his name – has presided over an inflationary bust that has put the Weimar Republic to shame. He has printed so much money that inflation has reached a meaningless number as there is nothing on the shelves to buy and, irony of ironies, they can no longer afford to buy the paper on which to print more of the wretched stuff. Hopefully their long suffering citizens will shortly be put out of their misery as their truly awful President gets his comeuppance.

So if the Fed are at it as well won’t we get galloping inflation here too? Maybe, but not just yet. The Japanese tried a similar experiment back in the 90s after their property bust led to a rapid contraction of the economy (as we are currently witnessing now). To get things going they spent trillions of yen on infrastructure projects building, amongst other things, bridges over every small stream and puddle across the country; just what Obama has suggested too. But Japan is still verging on the brink of deflation eighteen years later. Recession coupled with deflation is a pernicious thing. You can’t make banks lend, nor make people borrow for that matter if prices are falling, whatever you do with monetary policy (rates in the US and UK are lower than they been for a very long time); Keynes called it pushing on a string.

So unless all this money that the Fed and others are printing gets some traction, ie the velocity of circulation picks up, the danger in the short term is deflationary hence the record low yields on government debt. The price of gold, the traditional inflation hedge, is some way off its $1,000 high, despite there being an acute shortage of physical bullion in denominations that the “man in the street” can afford; Central bank and rumoured IMF selling are the likely culprits here. How long will this last until we get a real blast of inflation? How long is your piece of string?