Looking forward to 2009

In the run up to Xmas in the New Year the traditional press are full of articles either looking back or looking forward. When things have been particularly bad and we have no reason to fear the future the articles are predominantly ones reviewing how awful the year has been. When on the other hand we have every reason to still fear the future the articles ignore how awful it was in the past and concentrate on how terrible life will be in the forthcoming year. This is, of course, only human nature; the same human nature that drives markets, causes us to pursue excess in boom times and gloom in bad times.

There is probably no foolproof way of protecting ourselves against economic shocks. The best we can do is follow the old adages "don't put all your eggs in one basket" and "save for a rainy day", after all they have withstood the ravages of time and the increased complexity of the world we now have the privilege to life in. The other piece if homespun advice I would offer is "don't assume". Don't assume that the worst is over; don't assume that because the Governments have stepped in to support banks that your money will always be safe.

I believe that there are two really big shocks still in the system. The first is the unwinding if the uncertain position relating to credit default swaps and the second is further catastrophic collapse of the Hedge Funds. To avoid the effects of these we need the G20 conference scheduled in the New Year to tackle these problems and through some world type regulation create the conditions for an orderly retreat in these areas. Huge sell off of assets which these two problems may create, not only ensures volatility in the Market but it destroys negative correlations between the asset classes.

To avoid further financial disaster Government spending on non essentials needs to be reduced significantly. Banks need to be nationalised as it has always been clear that the bail outs already done merely prop up their balance sheets, they are not going to get any additional capital to lend from any other source than us the British Public – be it through tax or through savings. My next prescription would be to reduce taxes spent on non essential Government activity and introduce compulsory savings. Personal Retirement Accounts should be introduced early with no ability to opt out. Pension funds should be free of all taxes and further incentives should be designed for them to invest in renewal, green and infrastructure projects