Spring Fever
Swine flu, a major bankruptcy, rumours of big holes in US bank balance sheets… last week looked like “yet another shocker” to add to all the others that have roiled the financial system.
Not so long ago, any one of these events would have wiped billions off stock markets; together they would have caused catastrophe. But something has changes. Traders seem bent on shrugging off the bad news and continuing a winning streak that has lasted almost two months. As Richard Dunbar of Scottish Widows observed on the BBC Radio 4 Today programme, “the market has moved from 100% fear to 100% greed” in six weeks flat.
This feels like a pivotal moment in 2009’s titanic battle between bulls and bears, and the bulls would appear to be in the ascendancy. Equity markets across the developed world have jumped by a third; emerging stocks are on fire; and risk indicators are retreating. Three-month Libor (the inter-bank lending rate) dropped below 1% this week, reflecting banks’ willingness to trust each other again.
Meanwhile the big guns are out in force, reiterating their conviction that the good times are rolling again. Hedge fund manager Crispin Odey, who made a fortune shorting bank shares on their way down, has reportedly made another mint after buying them at the bottom, and he’s convinced the rally has only just begun.
Investors, like policy-makers, are betting that optimism will prove self-fulfilling. Clouds become mere appendages to big silver linings. As for unequivocally bad news – a huge increase, or confirmation that UK house prices are still falling – it is simply ignored. Investors seem to be on a mood-enhancing drug. And, in a sense, they are. Governments and central banks have been issuing vast quantities of a stimulant (cheap money) that gets markets high. But the drug is still in trials, and may yet have adverse side-effects. Try soaring inflation, for starters.
There’s now a risk of a massive trap for unwary investors. Having preserved their money after the first big crash, they are now being set up to lose it in the next one. The economy is still in deep trouble and markets cannot ignore that fact forever. The most that can be said at this point is that financial Armageddon is no longer looming. If that’s true, it may well be worth 20% on share prices, but is can’t create a sustained bull market. For that to happen, more good news is required. Recoveries in the real economy tend to require something more substantial than a handful of semi-cheery surveys.