Investment Club: Is following the herd the only way out of the doldrums?

The current response would be that the stockmarket is up, oil is up, gold is up, manufacturing activity is up – but the Investment Club's unit price is down at 255p. In the face of all this euphoria should we admit we have invested wrongly and change tack?

Definitely not, and for two reasons: the UK's bull markets are artificial, built on debt, and the Greek financial tragedy example should frighten the next UK government into controlling spending and cutting debt.

Originally the club's paper and pencil analysis (papa) had two outcomes for the FTSE. One was the UK stockmarket hitting 5,100 before falling. This has now proved to be very wide of the mark. Papa's second scenario entails the FTSE100 reaching a high of 6,055.02, around the end of May, then dipping. As this bull market is generated by the 850-odd billion borrowing pumped into the UK economy by the government it will come to an end once borrowing is under control. Why should borrowing be brought under control? Because the Greek experience shows a country pays a high price for profligacy.

The Greek tragedy has come about because international bond markets are concerned about their spiralling debt. This is reflected in their refinancing rates. Greece currently has to borrow at around 7 per cent, the UK at about 5 per cent along with Italy, and Germany at 3 per cent.

If the disparity in yields were solely due to the weight of debt each country carried as a percentage of GDP, then Italy should be paying the highest premium for borrowing and the UK the lowest. But this is not the case, even though Italy's debt is highest at 114.6 per cent of GDP compared to Greece at 112.6 per cent, and Germany's debt, at 73.1 per cent, is a good bit above the UK's at 68.6 per cent. So the crux of the matter is who the bond markets perceive is keeping spending in check, and right now the UK budget deficit at 13 per cent is higher than Greece at 12.5 per cent.

Therefore the next government will have to be very mindful of the bond market opinion of how effectively it is managing our budget deficit.

For an idea of how savage these cuts may be, we can look to Ireland. Percentage-wise, their borrowing numbers match the UK's quite closely. In 2009, Ireland cut 5 per cent off their spending. Equating that to the UK economy we would be looking at cuts of about 65 billion in the first financial year alone.

That is a whole lot of spending power being drained out of the economy. In addition, business investment has sunk to all-time lows and consumers' savings ratios have climbed. These three factors should conspire to bring interest rates tumbling down quite dramatically. But that is a good six to nine months away yet. So for this month we will be watching that War Stock does not fall below a critical price of 66, at which point the club would be forced sellers, and a UK Greek tragedy will be unfolding.

If this scenario does develop then the club might well have to do a volte-face and follow the herd.