Governor Merlin's magic didn't do much for the Club

DURING last month's credit crunch, lyrics from a Jimmy Cliff song, "Let your yeah be yeah and your no be no now", and "You've got to face reality" occurred to me as Mervyn "Merlin" King, the Bank of England's magician Governor, said "now you see lack of liquidity, now you don't".

Or, now you see risk-taking without help, now you don't. Eventually he had to face reality but made a mess of things because along with his compeers, the Financial Services Authority (FSA) and the Chancellor, round the triangular table he had not prepared for reality.

Ben "Bent over backwards" Bernanke came out of the credit crunch with credit only because he helped out sooner and pumped billions of dollars into the US financial system along with making a half-point cut in the Federal Fund rate on 18 September.

Jean-Claude "Tricky" Trichet, the European Central bank governor, also indulged in massive financial pump-priming to get Europe's banks out of a tricky situation.

While the additional liquidity helped the western world's financial system, the Investment Club was counting on a crunch.

So, much to my disappointment, the Club's unit price fell 3p to 239p last month, as a result of the price of gilts and BP peaking in the middle of the month.

The Club, though, has a small but significant amount of money, in terms of its performance, to invest.

It will use this money to try to adjust its investments to account for the liquidity sloshing around the financial markets, which will eventually feed through to the economy.

Where does my paper and pencil (pap) analysis see the economy going and how should we invest our miniscule amount of fund on its conclusion?

There are not enough investment opportunities in the economy for all the surplus money flowing through it now that the leveraged buyout game has been curtailed. We are really only left with stock markets or commodities to invest in.

One big reservation about investing in markets other than the UK's is that I am doing so very late in the day; they are all well up this year. Another is, I am investing through a third party, which means less control.

For instance, if I invest through an investment company then there may be a discount to asset value of up to 15 per cent. If I invest through a unit trust, in a crisis there may be communication problems while you are left in despair as the market falls. In adversity, oeics can give you any price that suits them therefore they are in the barge-pole category.

Through BP the Club already has a stake in any oil price rise; gold would be the other commodity to take a punt on. To invest in gold we would have to hold shares like BHP Billiton, Rio Tinto or Anglo American. Now all these shares have had great runs, so once again the Club's coming in at vertiginous prices.

While there are smaller gold mining companies to invest in, to get the Club's share of the get-rich-quick party, I feel extremely ill at ease when I am being forced into an investment decision. Apart from straightforward traded options, any other exotic investment instruments are too scary to contemplate. Therefore, this month, the Club will adopt a wait-and-see strategy.

If any of these share prices fall back I will use pap analysis to try and pick out the shares that are the least risky for the club to invest in.