FOR those hoping this is just a bad dream, Alistair Darling laid it on the line in his budget. In the midst of attempts to be upbeat, he could not help warning that we are in “difficult and uncertain times”.

Four sentences bear repeating in full. The chancellor said: “Turbulence in global financial markets – which started in the American mortgage market – has affected all economies from the United States to Asia, as well as Europe.

“We have seen significant disruption across many credit markets, with a number of them barely functioning at all. And since the turn of the year, global stock markets have also been affected. This poses a major risk to the world economy.”

These sentiments explain why last week’s jump in share prices, on the back of the main central banks’ £100 billion lending plan, was short-lived. This crisis is all about lack of trust by the banks, in one another and in would-be borrowers.

The question is how far that lack of trust will slow down economic activity – the recession threat – and whether it will coincide with a commodity-led rise in prices – the stagflation threat.

I believe that recession is a much greater threat than stagflation, unless we see widespread workforce unrest and inflation-busting wage demands. The longer the slowdown goes on the worse it will get, and there are no quick fixes.

As the world’s biggest economic powerhouse, the US is the key to recovery. American taxpayers are due to receive a $300 (£150) tax rebate in May. Few expect that to do the trick on its own. The two main obstacles are a lame-duck president and the uncertainty likely to greet the next leader.

A bleak prospect, but the Money section has been preaching for months the virtue of investing in large, well-run companies such as Tesco or Centrica. Put a little into a commodity fund if you feel brave, and above all get your own finances in order by repaying debt.

Splits signpost?

TWO items stood out among the budget proposals: long-term mortgages and the confirmation of 18% capital gains tax (CGT).

Darling’s predecessor and mentor, Gordon Brown, was so convinced of the calming effects of 25-year fixed-rate mortgages that he commissioned David Miles, of Imperial College London, to report on their feasibility.

Miles obediently recommended them, but admitted that selling them would require borrowers to ponder their views on the long-term outlook for interest rates and other arcane issues.

Few lenders have offered 25-year mortgages because they prefer to lure customers with two-year fixes. And that suits borrowers, as we move house on average every six years. On Wednesday, the chancellor called for “flexible” long-term fixed deals. That’s the problem, Darling – they are inherently inflexible.

So these mortgages have to be portable, but borrowers will still want out if they end up being too expensive. The problem is, who pays for that option – and who takes the risk.

Lower CGT is taking effect at the start of a year when Darling is going to swamp us with issues of gilt-edged stock to cover the billowing hole in his accounts. I predict the two together will mean the return from the grave of split-capital trusts.

These products triggered one of the biggest scandals at the turn of the last century, mainly because they were corrupted by huge borrowings and a nasty habit of investing in one another, which compounded their problems.

However, if we can avoid such traps, they are an obvious way to exploit the difference between 18% CGT and 40% higher-rate income tax. A fund buys a high-yielding gilt – or share, for that matter – and gives the income to one set of investors and the capital growth to the others. High-rate taxpayers go for the growth, low-rate taxpayers take the income.

Let’s hope fund managers behave themselves this time round.

Charlie is right

WARREN BUFFETT recently became the world’s richest person with an investment approach that is breathtakingly simple: buy into companies you understand, at a reasonable price, and hold the shares for a long time.

Buffett happily shares the credit for his success with his long-standing partner, Charlie Munger, who naturally espouses the same principles of common sense and simplicity. But, in an explanation of his methods last week, Munger went a little further.

He gave the example of how nearly every city in the US now has only one daily newspaper. While there were still two or more in a city, he and Buffett would invest in the dominant one before it achieved a monopoly by outliving the others – most spectacularly with a $10m bet on the Washington Post that turned into $1 billion.

It sounds easy in retrospect, but alert readers will have noticed an extra factor: spotting opportunities early. Like any skill at the highest grade, from Tiger Woods’s golf to Einstein’s analytical intelligence, this is tough to teach.

Munger explained: “It is very useful to get the capitalist perspective, then you will understand the reality you are dealing with as part of the proper training of your mind. You have to train yourself to develop the knack of using the knowledge you have – and you have to work at it.”

If that seems too daunting, the other side of this 84-year-old billionaire’s philosophy is slightly easier to mimic: underspend your income, minimise losses and, as Munger put it, “avoid inanities”.