“Well what shape is it?” has been one of the most recent questions I have been faced with. “Is it going to be a V or U shaped recovery, or maybe a long bath shape?” Of course one would love to come out with a firm and clear idea of how the market will come bouncing back, but of course one can't because not only would it be an irresponsible guess but also because nobody actually knows.

However, more importantly I think that this question reveals confusion about what is actually going for many investors. Rather than thinking about stock markets going up and down in a U or V shape, actually what we are probably seeing is an economic slump. This may sound overly dramatic, but in effect the withdrawal of credit facilities on a broad scale may well be such a catalyst. We must not confuse the variability of a stock market's dramatic fall in a bear market with something more fundamental - that is to say the retreat in the value of certain major economies. What we are witnessing now is most likely the end of the era of easy credit for all - which may well have major and lasting implications for the economy.

Within the US economy we have seen a self-inflated boom being created, which both overheated and over expanded the economy to an unsustainable level. The result is that we are now seeing a slump back to lower levels than before. Thus, to find a suitable alphabetical letter to illustrate this, what we are seeing in fact is an L! That is to say the economy is going down and then it will go flat - well at least for the time being.

During a bear market there will be some dramatic rallies, but many such will be “faux” recoveries which serve only to suck in the over optimistic investor who thinks they have solved the riddle of alchemy and have found the lowest value of the stock market and invested accordingly.

With such an L shape, we will see the re-setting of longer term growth in the US from a level of around 3% falling back to about 2%. This may not seem much at first, but its reverberations around the globe on other economies would most certainly be significant. Not least of these would be China who have already highlighted their concerns over any fall back in US demand and how that could reveal their significant manufacturing overcapacity in key areas. China's growth is already expected to fall from 11% to 7% - described to me recently as a car suddenly braking from 70mph to 40mph; still going forward but after a rather frightening lurch.

However, that is not the only issue. Such lower growth figures will also impact upon investment returns. Lower returns must then put the spotlight on investment costs and charges and this is going to be a crucial issue for the investment providers and managers to address. For the past few years a complacent investment industry has thrived on the back of easier returns in rising markets and leading to some raising their Annual Management Charges (AMCs) and Total Expense Ratios (TERs) - this may have to now be reversed. No doubt a painful process for some but a necessary change in order to prove better value for investing clients.

As I am writing, “mutter from the gutter” still swirls around more bank defaults and hedge fund failures. So far many are just relatively minor affairs but the overall value is adding up. The possibility of a larger scalp being taken seems to be rising by the day.

And finally…….quite surprising news from Vermont that two towns, Marlboro and Brattleboro have approved a measure that would instruct police to arrest both President George Bush and Vice President Cheyney for “crimes against the Constitution”. Although sadly non-binding and also sadly 8 years too late.

Have a good week,

Justin Urquhart Stewart
Director
Seven Investment Management Limited