Investment club: The G force will keep us safe

THE financial markets started to tilt in the Investments Club’s ­favour last month. Or did they?

Alas, by 31 October these burgeoning forces of amity had not fed through to the Investment Club’s unit price, which sank 3p to £3.21. Is the club able to discern whether the coming correction in the markets is just another consolidation before the next drive up or, the first hints of a continuing bear market?

The answer is dependent on whether the present crisis is a function of liquidity or insolvency. If the cause is liquidity, then the FTSE correction we predicted last month will be a consolidation before the next climb. But, if the crisis is from insolvency, then the next step down in will be one of many into the abyss.

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Governments are treating the credit crunch as a liquidity crisis. The remedy, therefore, is to flood their economies with money until liquidity is restored and normal trade is supported. Insolvency, on the other hand, does not respond to flat money. It means economies are spending more than they earn and insolvency will overwhelm liquidity. It is difficult to tell which malady an economy is suffering. The tool our analysis has used since inception in 1995, to distinguish, is called the G force (Gf).

Gf describes the autonomous economic force that dictates the direction of an economy. Therefore, this tool tells the club whether an economy is growing, contracting or neutral. The Gf tool has been signaling negative growth since the late nineties, This, for the club’s investment plan, means equities will eventually fall and debt products rise.

The problem is, there’s no telling how long insolvency can be hidden by flat liquidity bolstering economies before the insolvency deficit overwhelms. With Ford’s Belgium plant closure, France’s $9.1 billion bail out of Peugoet Citroen, Italian car sales at 40-year lows and Germany’s output cut the cracks are there.

Where does this leave the club? In not too bad a position, provided all goes to plan. We have half of our assets invested in government bonds, which increase in value as the economy weakens, and half in cash.

The Investment Club will use its cash to buy into weakness and sell into strength. But this month, the club will again wait, make money as markets fall, and look for a buying opportunity.

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