An ETF to hedge against a dysfunctional British Establishment

What, if any, action to take as Bank of America Merrill Lynch and JPMorgan warn of financial turmoil? This comes just as the British Establishment - by way of the Tory Party and Bank of England - is split asunder. The Americans' stance is a familiar patter: markets flying close to the sun after years of central bank support.

Hence a dilemma: the US Federal Reserve seeks to create scope for stimulus come the next recession, but is raising interest rates into signs of an already-slowing economy. Meanwhile, the Bank of England's Brexit-wary governor remains keen to keep rates as low as possible, while its chief economist frets that without current action against rising inflation, rates will have to rise sharply later on.

Soaring asset prices from monetary stimulus has made it near-impossible for the younger working population to get on the housing ladder without massive cheap debt. We don't quite know for how long all this asset party can persist - with housing and shares alike boosted by low interest rates - or whether a de-pricing is baked in, as and when central banks "normalise" rates; and their balance sheets bloated by the quantitative easing years.

Dysfunctional Britain involves further uncertainty

The Conservatives had nothing to inspire during the election campaign and a hung parliament has meant their manifesto was effectively dumped in the Queen's Speech. They lack identity; some would say this is symptomatic of the political middle ground. Meanwhile, Labour is in the ascendancy with a socialist agenda that has captured the youth vote and continues to surge on social media.

As if domestic politics isn't enough to deter foreign inward investment, Britain shows little clear sense what it seeks from leaving the EU with negotiations underway, while Labour/Lib Dem peers threaten to de-rail the bill entirely.

Meanwhile, there is no sign of an export resurgence to capitalise on sterling's devaluation, one key opportunity the Brexit vote was meant to offer. Not to over-stress political instability - Italy has had 63 different governments in the last 70 years and has still grown its economy - but it's creeping into companies' updates, which is what counts.

DFS Furniture raises alarm on discretionary spending

I've always said it is going to need serious profit warnings to jolt the market. DFS Furniture is a good example of how consumer credit has helped it grow annual pre-tax profit from £7 million to £64 million in recent years; and relatively speaking the company is a shining example, with about half its manufacturing in the UK and importing only its leather sofas from abroad.

Trading since April has been lower than expected with "significant declines in store footfall leading to a material reduction in customer orders". This looks a red flag for discretionary spending: profits have been guided down, although continued strong cash generation has recently enabled a £20 million special dividend. So, although the stock price is down about 20% in June, it's by no means a disaster in equity terms. DFS has a strong cash flow profile and would likely weather a downturn well; it's one to watch for buying potential if premature as yet.

Another stark profit warning has been from Provident Financial, a "non-standard" personal finance group in the FTSE 100 index. Like DFS, its stock is down nearly 20% as consumer credit profits halved; however, it doesn't appear to involve demand for credit and the stock has anyway traded on a price/earnings (PE) ratio in the high teens.

Cutting the number of agents and using those who were self-employed left it with fewer loan collectors than expected, but the group is supposedly all-recruited with 2,500 positions and new technology to be fully resourced from July. Management claims "no change to the underlying credit quality of the home credit receivables book," and its other businesses are enjoying strong volumes.

Not surprisingly the market has priced the stock for a near 6% yield as questions remain what would happen if central banks' stimulus is peaking out, and it's just a matter of timing as to when rates rise against inflation.

Despite "sub-prime" US mortgage lending having played a key part in the 2008 crisis, a "doorstep lender" like Provident Financial has become a £3.6 billion company in the FTSE 100 with little attention paid to how high-cost consumer credit to those in meagre labouring jobs, has stoked economic and political risk.

Short the FTSE 250

Since the Brexit vote the FTSE 100 has offered useful means to hedge UK-specific risks, given its weighting to overseas-earners as sterling fell. But if strategists at the investment banks are right to warn how US stocks face an Icarus moment, international indices would plunge also. "Buying the dips" would then be tested; a strategy that has worked well during the monetary stimulus years, but the context is changing.

Long/short hedge funds would be in their element, albeit hazardous for most private investors to try and emulate such a strategy. The growth of exchange traded funds (ETFs) does, however, offer a straightforward approach, where for example there is a FTSE 250 Daily Short product, Boost FTSE 250 1x Short Daily ETP, which replicates the inverse daily performance of the mid-cap index - itself a decent reflection of the UK economy.

Mind that, although trading it is straightforward and liquid, brokers ask you to tick boxes as to your suitability - by way of risk tolerance and understanding. You need to be "sophisticated and knowledgeable", though I tend to think that should apply to anyone holding equities at this juncture.

Boost, the product provider, is sponsored by Wisdom Tree Investments Inc, a specialist ETF manager headquartered in the US, and the Boost products have won various awards - enabling investors to get synthetic exposure to equities, commodities, bonds and currencies.

The crux risk with this kind of operation is whether another crisis strains the swap counterparties which form the basis of the products; a matter on which Boost assures. If you visit Boost's website you can consider the details e.g. under Frequently Asked Questions.

Admittedly this isn't a product for the general retail investor but, equally, retail brokers do allow you to trade it after various questions. Short exposure to the FTSE 250 index looks a compromise, but intelligent way to hedge an equities portfolio if markets are near an inflection point between high hopes and underlying risks.