The markets have been a bit wobbly recently. Inflation has been spotted rearing its ugly head and that has created some mini panic. Not too long ago the big worry was deflation. And before that it was something else, bird flu and bearded terrorists, acid rain and global warming and all kinds of other assorted mayhem. Im not saying inflation doesnt exist, in fact its higher than generally reported. But I doubt whether it is the monster currently being blown up by the frightmeisters.

The dogs that didnt bark during the recent spring storms are gold and the 10-year treasury yield. Both didnt move much. More important, nothing has changed in the global setup whereby Asia continues to hold inflation down. In the USA and Europe wage costs are driving inflation much more than commodity input prices and wage costs are still being held down by the relentless supply out of China and India.

What we have just experienced is actually one of the regular and healthy corrections which shake out the weaker elements in the speculative jungle. There is a lot of dumb money flowing here and there without much conviction and there are also plenty of aggressive and leveraged funds which make their living on the edge. They are creating a lot of noise but its better to ignore that.

As an aside, its interesting to note here that the average salary of the worlds top 26 fund managers last year was 363 million usd. The top guy, a certain Mr Simons, raked in 1.5 billion for himself. He charged his customers a 5% management fee and creamed 44% off the top. Nice work if one can arrange it that way.

The fact of the matter is that the global economy is still doing rather well, many equity markets are reasonably priced (at around 14 P/E this years expected earnings) and global corporations are living through the best of times. Having said that, volatility has to be expected, as always, and it pays to hold substantial cash reserves for all eventualities. Problems, even disasters which happen along the way, dont mean the end of the world. They are followed by solutions and life goes on.

At this time we recommend large, rather than small cap companies. Hong Kong and Singapore look good. Oil companies are still making barrels of money. Schlumberger (SLB) is a must-have stock in the oil services sector. Statoil (STL..OL) is cheap right now. We still wouldnt touch the tech sector but its nice to see prices approaching more reasonable levels. Perhaps we can buy something in a few months. Well let you know then.

And finally, if you dont agree with the above and are worried to death about the coming apocalyptic inflation: for Gods sake, buy yourself some gold.