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If you look at the stock market indices from the Second World War you will be left with the impression that it takes a lot to crash a market.
This is true. Crashes don’t come when the market is down; they come when it is high. There is no bubble in equities so a true crash is unlikely, but there is a bubble and it is bonds. 1% interest rates at a sovereign level is a bubble condition and we know what happens to bubbles. They burst.
Interest rates to governments are too low and they are a manipulation. They represent the paucity of other homes for large amounts of cash and a need of the world’s public sectors. Low interest rates like these are not available whilst credit to the private sector is high and uncommon.
The rate rises that have occurred sequentially in the economically weaker countries of Europe will soon arrive at the core. When they do the final lap of the Euro crunch will kick off and the beginning of the US crisis will begin.
Europe will likely federate or perhaps drop the Euro, either way it will be full of opportunity as dislocation opens up bargains.
Back in equity land it is interesting that IPO and M&A has started to drift back and the Cable and wireless takeover buy Vodaphone and the Psion/Motorola deal may just signal a change in the markets dynamic.
It would be welcome but, more importantly, it’s a trend to watch out for.
