Investment Club: If only the economy would behave itself

Another woeful month for the Investment Club with its unit price tumbling to £2.49.

On the bright side the future is looking a bit clearer - albeit not brighter - because the economic numbers are running closer to economic theory rather than randomly thrashing about.

For instance, in a calmer economic climate one might anticipate countries with higher savings rates to have stronger currencies. On this basis you would expect the pound to be gaining against the dollar because UK gilt yields are higher across the maturity spectrum. This has not been the case. The pound was falling against the dollar before May 2010 in spite of higher gilt yields. Recently though, the pound has slowly gained ground on the dollar. Why the change to more normal interaction between the UK and US exchange rate?

It is because the markets are saying they do not have confidence in the US Fed and its crazed debt frenzy. The Federal Reserve Bank has become an economic cannibal consuming its own bond issuance and, in the process, the largest holder of US government debt. By June, the Fed will have accumulated $16 trillion of its own bonds. That is a greater holding than the next two largest bond holders, China and Japan, put together. Consequently the markets are backing David Cameron's more rational strategy of debt reduction.

If both Cameron and Obama fail to control budget deficits then there will only be one game in town: the stock market.

To cover this eventuality the club bought some Scottish & Southern Energy (SSE) shares. Our holding of SSE did very well at first, but then less well. However, we are still in profit and the dividends are good.

If there is a substantial run-up in the share price the club will take advantage in order to raise some cash before the party is spoilt by a number of possible sources.

First, the club's predicted highs for the FTSE and Dow have been reached and it may be time for a period of consolidation.

Also, trading volumes are too low for a bull market. If China and India slow their economies to try and squeeze inflation out this too might cause trouble for western stock markets.

Another boring month for the club, then, but we will not be nodding off in case we have to act quickly to preserve capital..