More immediately, and far more importantly, for all of us are the continuing concerns over the imbalances in global currencies and global trade. There is now general agreement that these imbalances are ‘a clear and present danger’ to the global economy and that political platitudes are not going to make these problems go away.

Much hope has been put upon the next G20 meeting in South Korea in November (as opposed to the controlled G1 meeting in North Korea) but I suspect certain entrenched positions have been well prepared for that already. So will the US authorities just patiently wait for a consensus to arise or even more patiently await the acquiescence of the Chinese government – and of course the answer is no. With the impending election, the US Administration will wish to be seen to be in control and taking action. So what are the alternatives? Another stimulus package? There seems to be little appetite for this, especially with the rising debt levels. However, there is one thing the US can do and virtually without any constraint – print more Dollars.

So another round of quantitative easing, nicknamed QE2, would seem to be on the cards. This then could push the Dollar down further (the effects are already being seen) and the developing nations will suffer the pain of their currencies rising (Brazil especially, where the Real has increased in value against the Dollar by 4.76%, and the Thai Baht by 12% over the past year) and their exports become less competitive. The one exception to that of course would be China where the ‘controlled basket’ would restrict much of this impact.

The result of this would be that imports into the US should be more expensive and thus import inflationary elements into the economy. This would then be a far more aggressive currency policy by the Americans but it would allow them to inflate their way out of the problem – and of course in doing so do everything they can to avoid deflation.

As for the others? Well either they fight to cap the rise in their currencies (and we know how expensive, wasteful and ultimately useless often such policies are) or see their exports become less competitive and end up collecting more devaluing Dollars. As for the Chinese they too will suffer as their reserves, now standing at around $2,650bn, a good proportion of which are in Dollars, will be equally weakened.

As the reserve currency to the world (at least for the time being) the US can carry out such actions and it reminds me of the quote I have used before from President Nixon’s Treasury Secretary Connolly. “Our currency, your problem”.

Three in a row and something has to give. This market reminds me of those street tricksters with the three cup game and trying to find the pea under one of them. Today we have three cups in a row – government gilts, gold and the equity market. All three have been rising remarkably - which is a rare occurrence and most of the investment types I meet seem to be scratching their heads and wondering which one is going to turn around first?

Gold has been rising thanks to those fearing inflation. Gilts are rising, pushed by those fearing deflation and that any further quantitative easing could see more government debt purchases. Then equities are rising as they are also anticipating another round of economic stimulus in the form of more quantitative easing. They can’t all be right!

So what is going to give? My suspicion is that when the US QE2 announcements are made and the reality of the outlook hits home, that it will be the equities that will suffer. ‘Buy on the rumour; sell on the fact?’ This may be such a situation.

And finally – I am indebted to my good friend Graham Roberts for one of the best illustrations of the importance of the insurance industry.

Obion County in western Tennessee doesn't have a fire department. County residents who want fire protection must pay a subscription fee to one of the eight towns in the county. Obion resident Gene Cranick lived near the small town of South Fulton and in the past had paid the $75 annual subscription fee for fire service. This year, he didn't pay.

On 29 September his grandson lost control of a trash fire outside Cranick's mobile home and the home ignited. The South Fulton Fire Department didn't respond to the 911 call because Cranick hadn't paid the fire fee. Fire-fighters did show up to protect the property of Cranick's next-door neighbour, who was a subscriber, but the fire-fighters were forbidden to fight Cranick's fire. Cranick lost everything, including four pets that died in the fire.

The incident has aroused strong emotions. Cranick's adult son punched the fire chief later that day and was arrested. Cranick has made numerous appearances on cable news shows, claiming that he ‘forgot’ to pay the fee this year and thought the fire department would bill him if he had a fire. South Fulton officials have defended themselves, saying the subscription fee has been in place for 20 years and subscribers who don't remit their fee each July are reminded by mail and a phone call. The mayor said if they allowed people to pay the fee only after they had a fire, soon no one would be paying the fee. He's probably right about that.

Let’s hope our government cuts don’t go this far.

Have a good week.

Justin A Urquhart Stewart
Director
Seven Investment Management Limited