After the sell-off of the past few weeks, investors are nervous - and as a result, inclined to believe any bad news thrown at them. Perhaps not surprisingly, the doom and gloom merchants have emerged from the woodwork, announcing that they said it was a bear market all along and that after a three-year bull run it is time for the going to get tough.
As proof of their wisdom, it is usually cited that these doom-mongers called the top in 2000. No mention, of course, that their analysis completely missed the bull run they have just declared to be over. Nor any mention that they have declared the same bull run to be dead more than once in the past three years.
Their concerns fall into one of two categories. Some worry that the US Federal Reserve has been so loose with monetary policy that it will now have to squeeze inflation out of the economy aggressively, meaning that a recession is inevitable. Others think that a recession is already happening and we haven't noticed yet. The appointment of a new man to take charge of the Fed makes such stories easier to believe, but doesn't make them any more accurate.
To take the first point: undoubtedly monetary policy was loose after the technology market crash and the 2001 terrorist attacks, and the Fed funds rate was below the core level of inflation from 2002 to 2004. But the idea that this generated a debt-fuelled boom in the US is wide of the mark.
Most US debt is fixed mortgage debt, which can be refinanced if long-term interest rates fall, but doesn't kill disposable income if short-term rates rise. Most other debt is driven off prime lending rates, which, wait for it, are currently 8.25 per cent. So if anyone is going to suffer from higher interest rates it isn't going to be the US consumer.
We know that a lot of people did borrow money at very attractive rates, and that they used it to put down deposits or to buy condominiums in Florida and California. We also know from the people who built the condominiums that a lot of those deposits have been forfeited, as the borrowers had no intention of ever living there. Instead they simply intended to "flip" them on to a bigger fool, but as often happens, the bigger fool never turned up. This weak housing market is evidence for the "US already in recession" school of thought, but if we look at other evidence that proposition becomes harder to believe.
This week, for example, the US Office of Management and Budget lowered its projections for the 2006 deficit by $140bn (£76bn) to around $300bn. Of this improvement, 90 per cent was due to higher tax revenues from individuals and companies. This is not down to higher tax rates, but higher earnings. Nobody fakes these numbers.
So who has benefited from the low interest rates over the past five years, and by extension who has most to lose? Step forward the usual suspects: banks and hedge funds - and we know what has happened to them in the past few months.
We have an old saying in the markets: "Don't confuse brains and a bull market", and over the next few months a few people will be realising that they weren't actually that clever. But who are the ones really in trouble? Think of homeowners in countries such as Greece, Spain and Ireland. Read the Rich Lists; see that Ireland is apparently the second-wealthiest country in the world; bear in mind that property in Dublin is more expensive than in London - when wages are half the level - and note that the Irish are taking out 60-year mortgages, a phenom-enon last seen in 1980s Japan. Maybe they are all investment geniuses, but when the European Central Bank raises its rates, I guess we shall find out.
Mark Tinker is a director of Execution Stockbrokers. Mark.Tinker@Executionlimited.comReuse content