The US Congress gives the appearance of being in power but not in control, and the president is content to sit back and let them take the flak for any failure. After all, he has four years left in his term, while the Congress faces elections in just two. Meanwhile, the Federal Reserve Bank of the US continues to run the US economy as it has responsibility for interest rates, cash liquidity and unemployment!

The fiscal cliff, however, was just a sideshow. It is more like a fiscal air pocket in the course of a so-far four-month long equity bull market. Any number of economic shocks, a big rise in the oil price or a bank failure in Europe has just as much potential to unsettle the behemoth that is the US economy. It gave the US Congress something to spoil their Christmas holiday, but also distracted them from the fundamentals.

There is an awful lot of good economic news out there - most global economies are working fast to get back onto an even keel. Expectations are rising, whether for US house building starts, healthy company profits and even of Chinese purchasing managers. Economies are either growing or are past their recessionary trough, inflation is low, and there is much governmental support. Even Spain and Italy are paying a lot less for their debt than just a few months ago.

The key indicators of worry, which are gold, the dollar and the US equity volatility index, the VIX, are all back to pre-Euro debt crisis levels. It is an environment which investors call a "risk-off environment". The big known unknown risks seem to be normalized; there will be headwinds, hurdles and roadblocks - but nothing like a potential banking meltdown.

The authorities first in Europe, then the US, and now Japan have of course depressed interest rates to almost zero and printed money like it has gone out of fashion in an attempt to stimulate growth. So we shouldn't be too surprised when economic recovery actually happens!

This means that there is a good chance of an equity boom in 2013 - at least in the first part. The last two years has shown that what goes down then comes up - whether the investment sector is US home builders, Greek government debt, the value of the euro against the US dollar, or the banking sector worldwide. If that is true, then closer to home the response would be to buy China A shares if you can! The Chinese market has fallen since July 2009, an rare three-and-a-half-year record, now apparently recovering - in December alone it rose 16 percent.

The market is likely to correct the unusual situation where relatively less risky bonds have outperformed relatively risky equities. The risk-return relationship for bonds is now unattractive as investors make money from bonds if interest rates fall - currently an unlikely occurrence.

In 2011, the euro meltdown led to people rushing into "safer bonds", pushing returns up to 8 percent globally, while equities fell 8 percent. In 2012, bonds rose 2 percent, while equities rose 17 percent. Normally investors expect a higher return from the latter as they are taking more risk.

The concern now is how all that printed money can be taken out of the economy when we have become hooked to it as a drug. If it stays in, it will cause inflation, if it is pulled out, it will cause recession. Central Bankers are the new masters of our Universe. Inflationary expectations are likely to become more important in 2013 than previously. But if you make more of something, its value falls. The big investment story of 2014 might be the inflation meltdown.

The bad news is the bull market may last for only the first part of the year - for perhaps a 20 percent rally. This is too big a number for investors to miss even if the market is likely to falter, but the longer investors wait, the more conservative they will have to be. A mantra in investment management is that if you are going to panic, panic early.

The author is chief executive of Port Shelter Investment Management.

(HK Edition 01/05/2013 page3)