Pulling on a piece of string!

What this means in practice is that storm clouds can take a long time to develop in investment markets, and then strike very suddenly. Equally on the upside of investments, fortune favors the patient long-term investor, provided they make the right investment of course.

Now global financial markets have been placid this year with volatility at record lows in many bourses. And yet events have been pulling the string attached to the brick very hard.

We have had rising US interest rates, very high oil prices, falling consumer demand in some countries, falling house prices in the UK and Australia, and two hurricanes in the southern USA.

Some analysts choose to see the passive response of financial markets to these events as an indicator that financial markets have become very resilient, and even above such unfortunate realities.

But like the Ostrich that sticks its head in the sand when faced with danger, just because you refuse to see it does not mean that the danger is not there. For asset prices must always reflect the real outlook for future earnings, and it is hard to be terribly optimistic at the moment.

Consumer is king

Consumer demand is what drives the modern economies of the world, and it is consumer demand that is coming under pressure. Whether that is the 25% collapse in General Motors' sales in September, or the stalled housing market in the UK, or a 22-year low in UK high street sales, you are hard pushed to find anything worth cheering about.

For consumers now have less in their pockets to spend, thanks to high energy prices and rising interest rates, and have finally started to pay off their huge debts. Whether this turns into a recession or not it will certainly have a big impact on company profits and therefore share prices and also real estate.

Why then are global stock markets coasting along? It is true that energy shares are compensating for a weak retail sector in some indexes. But are we not about to see the final lancing of the huge investment bubble that has built up in global housing and equities?

When this particular investment brick flies through the air a great many of those complacent people watching stock markets at the moment are going to get hurt.

Perhaps that is why the gold price is at an 18-year high, although it is still at a 25-year low when compared to oil, and there is room for much upward movement in gold as other asset classes turn down and investors seek a safe haven.