SUMMARY. Last month we suggested taking profits, now uncertainty is clearly creeping in. Yet the dark clouds hide a more encouraging future, less reliant on extraordinary levels of debt which create only the mirage of wealth.

In our early October commentary we suggested you should be looking to take profits in some areas, and rebalancing into others where there was still obvious value. As October progressed markets around the globe hit post-Crunch highs, but uncertainty is now creeping in, and will likely continue for a while yet. And so it should after 50% rises in many areas, and bearing in mind we are still midst an extraordinary global experiment to get the world economy back on an even keel.

In the wider economy, while the UK economic growth numbers a few days ago were startlingly bad, most people realise they are unreliable estimates, subject to huge adjustment, and largely at odds with what appears to be going on in the wider economy (which can best be summarized as a degree of stability, but at a low level). Particularly encouraging was that UK businesses are repaying debt and rebuilding cash balances, which is a decent indicator of new business investment and renewed hiring in 2010. In addition an EU survey of confidence also showed a strong improvement in the UK and continental Europe.

The US is less encouraging, where similar confidence surveys are rolling over and down. The headlined “end to recession” in the US is also not what it seems. Once you strip out cash-for-clunkers (accounting for half the improvement in economic growth in the third quarter), the first time house buyer tax credit, and a bit of inventory rebuilding, there isn’t a lot of growth left. Remember each of these elements is a one-off, and the ongoing impact of the massive stimulus in kick-starting the wider US economy is not clear.

At the other extreme, in Asia, the greater risk is overheating, and each time another country puts its interest rates up (to take the heat out) the US and UK markets twitch nervously. Our rates will have to go up one day, it isn’t likely to be soon, but whenever it is unlikely to be without short term pain. For example, at that point gilts yields will likely spike higher on inflation fears, and equities will sell off; but will the authorities be able to insulate the wider economy as wobbly financial markets adjust to something like normality, which must involve higher interest rates?

Such dark clouds do tend to conceal the more encouraging long view. Uncertainty now is part of the price we pay for a adjusting to, and building a foundation for, a future which is much more stable, and isn’t built on extraordinary levels of debt creating the mirage of wealth.

In the short term we continue to recommend taking profits and reducing risk, as mentioned last time.