You could not make this up if you tried.

Britain gets its knickers in a twist over a hung parliament, Europe has been unceremoniously skewered by a Greek debt crisis, and if that wasn’t bad enough, the Bank of England’s Monetary Policy Committee sits idly by as the rate of inflation climbs.

Welcome to the month of May when investors are supposed to sell and return again on St Leger’s day.

If truth be known, a hung parliament was always on the cards. It was always likely that no single political party would win enough seats in the May general election to form the next government.

Consequently, much horse-trading and political wrangling would follow when all the votes were counted – in some cases re-counted. What we did not expect, though, was politicians putting their self-interest ahead of the country’s interests.

While these unedifying events are taking place, the market is watching.

Thank goodness our politicians have finally come to their senses. When will they realise that the market is not interested as to whether the Tories and the Liberal Democrats can reach an agreement over electoral reform. Nor is it bothered about David Cameron’s Big Society.

It simply wants to know how Britain intends to tackle its Budget deficit. Each day that passes without a resolution to the political impasse means another 500 million pounds will be added onto Britain’s debt tab.

For now, the market is prepared to cut British politicians some slack, but it will want to see some concrete proposals soon. While political squabbling takes centre stage, the Bank of England is happy to sit on its hands.

Without a coherent strategy to tackle Britain’s inherent structural problem, namely its debt, the Bank’s interest-rate setting committee has been paralysed into inaction. Therefore it is hardly surprising that the MPC decided to leave interest rates on hold at the last meeting.

But it won’t sit on its hands for much longer. Europe has, to some extent, managed to find a large enough sticking plaster for its Greek debt crisis. A $1 trillion cache of ammunition in the form of guarantees from the International Monetary Fund and European countries should be enough to deter speculators from betting against the euro for now.

However, structural problems remain, and Europe has no room for complacency. These are difficult times not only for governments around the world but also for investors. However, it is in times like these that private investors can steal a march on the professionals.

The falls in markets around the world has provided private investors with great opportunities to buy shares at attractive prices. They say that this time things are different – the problems are some of the worst we have seen in generations.

That may well be true. But it also means that we are seeing some of the best investing opportunities for generations.

-David Kuo is director at The Motley Fool. The opinions expressed are his own -

There is a well-trodden saying that markets hate uncertainty. Elections are inevitably uncertain, so until the votes in the next election are counted we cannot be certain which party will govern the UK.

Currently, there are suggestions that no single party may get sufficient votes to form the next government outright. It is true that the Conservatives have a strong lead over its rivals. However, with a first-past-the post voting system, it only takes a small swing away from the Conservatives to change the complexion of the next parliament.

But let’s look at the problem facing the next government, whatever its colour. It may be blue, it may be red or it may be some combination of red and yellow or blue and yellow. That said, no government can ignore the budget deficit of £175 billion and the national debt of some £800 billion.

Politicians may like to stick their finger in their ears or bury their heads in the sand and pretend the problem does not exist until the election is over. But creditors won’t forget. Following the election, the next government knows that there will be howls of anguish and squeaking of pips when taxes are increased and public spending is slashed.

No government, a hung parliament or otherwise, can afford to ignore its creditors. The alternative is an even heftier annual interest bill. The current annual interest payment is already a whopping £40 billion and could rise further.

So, does the market have a right to fear a hung parliament?

The answer is no. Britain will need to sort out its financial mess regardless of whether George Osborne, Alistair Darling or Vince Cable takes charge of Britain’s finances. The cuts in public spending will be severe and the tax hikes will be penal.

What is uncertain is who will reside at 11 Downing Street. What is not uncertain is that whoever resides at number 11 will have to dance to the tune of gilt investors. Failing to tax and mend could result in damaging the pound, which in turn will stoke inflation and push up interest rates.

Ironically, the stock market may continue to thrive while the UK’s electorate considers where to place their “cross” on election day. For most FTSE 100 companies, what is happening outside the UK is of greater relevance given that over 80% of their profits are generated abroad. The UK’s top 100 companies earn more in both the US and Europe than in the UK.

So, by all means ponder the hue of the next government. The outcome will have an impact on our daily lives but it is unlikely to affect the markets, which are more interested in global issues.

If you thought 2009 was as bad as things will get, then think again: 2010 could be worse. It is likely to be a year of enforced austerity with both the government and households making obligatory cuts to their budgets.

High on the government’s agenda will be reducing the Budget deficit, if the UK is to avoid the embarrassment of having its sovereign debt rating cut by rating agencies. This will have a knock-on effect on households, which could see their disposable incomes slashed by hikes in both direct and indirect taxes.

There are two possible ways for the government to reduce the Budget deficit. The first is to increase tax revenues and the second will be to slash expenditure – both of which will have an adverse impact on the economy. There is a third, which is to raise revenue through the sale of state assets. These may include the Royal Mint, the nations stake in part-nationalised banks, and anything else the Chancellor might find lurking at the back of the wardrobe.

It should, therefore, not come as a huge surprise to households next year if the government takes a larger proportion of our income through tax hikes. It is unlikely that businesses will be burdened with increased taxes (unless you include banks), so wage earners will shoulder most of the responsibilities. Consumers have already been warned of the reversal in the 2.5 percent cut in VAT on 1 January 2010, and it would not be unreasonable to expect VAT to rise to 22.5 percent or even as high as 25 percent afterwards.

Controversially, London shares may perform well next year even though the economy may remain in the doldrums. That’s because companies that generate a vast proportion of their income overseas dominate the FTSE 100 index. As a consequence, The Motley Fool still believes the FTSE 100 index could hit 7,000 points next year if businesses can achieve their profit targets next year.

Some of the bests performing London shares are likely to be those that have significant overseas exposure. So, look it may pay to look east for the best picks. These are likely to include banks such as Standard Chartered and HSBC. African insurer Old Mutual may also do well, as could British American Tobacco that sells its cigarettes to almost everywhere but the UK.

China will continue to grow – it can’t afford not to. This therefore bodes well for commodity companies such as Anglo American, BHP Billiton, and Rio Tinto. Meanwhile, the rise of the Asian consumers, who are expected to unleash their spending powers next year could benefit upmarket retailers. Burberry, which already generates a quarter of its income in Asia, may be worth keeping an eye on.

The rise in global stock markets will provide some investors with a difficult choice – to continue pushing up the price of a non-income generating commodity such as gold or invest in income-generating assets such as shares. The latter could prove the more attractive investment, which could spell an end to gold’s extraordinary run.

Interest rates may push higher too, given that there are already signs of inflation. The increase in November’s CPI to 1.9 percent from 1.1 percent in October would suggest that inflation is far from benign. Under normal circumstances, the base rate would be at least 2 percent if inflation is to be kept in check.

The rise in interest rates may make gold investors to think twice before piling more money into the yellow metal. Currently, it costs almost nothing to hold gold given that interest rates are effectively at zero. But that may not be the case if interest rates rise.

If there is one lesson we can take away from the global turn it is that the economies are cyclical. We have has ten years of fat, and now it is time to prepare for ten years of lean. And if anyone should ever tell you that they have beaten the “boom and bust” economic cycle, just nod politely and rebalance your portfolio.

The housing market is probably one of the most keenly followed markets in Britain. Every month we are hit between the eyes with no fewer than eight separate indices that provide pointers to the state of play in the property market. These include supply side figures from Rightmove, demand side numbers from Nationwide and mixed-adjusted indices from the Department of Communities and Local Government.

The plethora of indices is enough to make anyone draw the curtains and lie down in a darkened room. But it is important to appreciate that each set of data will be different because they are drawn from very different data pools. For instance Rightmove’s index is based on sellers’ asking prices, which tend to be more optimistic than say, Nationwide’s index which is based on agreed sale prices. Additionally, Nationwide’s index is derived from mortgage approvals, and not everyone may need to apply for a mortgage.

Our anxiety over house prices probably stems from the fact that a home is the single biggest purchase that most of us will make in our lives. So, it is understandable that we want to know that our money is well spent. Worryingly, there are some seven million people who are hoping that rising house prices will save them from poverty because they have not put away enough money for their retirement.

If you are wondering if house prices have bottomed, the answer is probably not. Currently, the price of a typical home in the UK is around £153,000, which is still six times the average annual wage of a British worker of £24,000. The cuts in mortgage rates have helped to ease the burden of servicing mortgages. However, there are dangers to relying on low interest rates.

Whilst house-price watching is a popular national pastime, and one that I have to do professionally, it has never interested me that much on a personal level. That’s because I have neither considered my house as either an investment or as a substitute for my pension.

I have always thought of my home as a roof over my head that meets my living needs. After all, if I didn’t buy one then I would have to pay rent to a landlord, which wouldn’t bother me too much. At least as a tenant I wouldn’t find myself knee-deep in sewage unblocking a drain with a plunger on a sunny Sunday afternoon.

During my twenty or so years as a homeowner, I have seen property prices rise and I have also seen them fall. That said, over the long term I have been fortunate to benefit from rising house prices. The appreciation in property values has allowed me to steadily build up equity in my home albeit punctuated by periods when prices fell. Nevertheless, house prices would now need to drop quite significantly to catch my attention.

Clearly, adopting a relaxed attitude towards house prices has taken many years of practice. It has also been helped by regularly channelling money into other assets such as the stock market, bonds and cash. By doing so, the value of a home, no longer becomes a fixation but instead just another part of your growing portfolio.

The allocation of assets, albeit crudely in the case of offsetting rising property values with shares, is one of the keys to building wealth over the long term. So, if property prices rise, it is important to adjust the mix of assets you own by investing more in assets other than property. This means investing not only in shares but also in bonds and cash. In other words, it is important that you have a well diversified portfolio.

One thing to bear in mind is that asset allocation will not maximise your returns. But it should do the next best thing. It will reduce the risk to your wealth. In a nutshell, living modestly, overpaying your mortgage and having a properly diversified portfolio will enable most of us to ride out market downturns. And any paper losses you may incur from time to time will not affect your life too much because you are not losing actual cash!

The Bank of England Monetary Policy Committee decided to leave interest rates unchanged at 0.5 percent in May. This came as no great surprise given that the Central Bank has already slashed interest rates to a level where further cuts would have made no discernible difference to the cost of money.

That said, there are other ways to drive down the cost of money. In this regard, the Central Bank still has plenty of gunpowder left in its keg to blast the UK economy out of the doldrums. So far, it has only printed two-thirds of the 75 billion pounds of fresh money authorised by the Government for quantitative easing. It can pump in another 75 billion pounds into the economy after that. So, in total, it has 150 billion pounds in its armoury.

It can be argued that the Bank now has little choice but to continue pumping money into credit markets through quantitative easing given that cutting interest rates has not worked. After all, the problem that that UK faces is not the cost of money but instead the quantity of money.

Curiously, pumping 50 billion pounds into the credit markets has yet to have an effect on broad money growth. But at some point quantitative easing will increase money supply. However, it will come at a heavy price – inflation.

Of course inflation appears to be subdued at the moment, though this depends on which inflation index is used to measure the rise in the cost of living. The Retail Prices Index (RPI) has fallen to zero but the Consumer Prices Index (CPI) rose from 3 percent to 3.2 percent. The latter, which excludes mortgage costs, suggests that the cost of living is still going up at a time when consumers have little appetite to spend money.

The danger for consumers is that when Quantitative Easing begins to work, the surge of money and credit into the economy could boost inflation significantly. It is therefore vital that savers ensure they are properly invested in assets that keep pace with inflation.