In recent months many have taken to depicting Wall Street as one of the biggest financial bubbles of all time. Plainly the Americans don't believe it. Readers will know that we haven't been exactly immune to the bubble theory ourselves, but we somewhat belatedly changed our minds when we saw action from the Federal Reserve to quell the turmoil in financial markets last autumn, and the subsequent strength of the recovery in equity markets.
There are still good reasons for caution, and the bears must be right in insisting that eventually there will be a correction. Increasingly, however, they become like Tony Dye at Phillips & Drew; the scale of the correction now needed to vindicate their underweight positions in US equities has become so horrendous that it would take an economic calamity of monumental proportions to bring it about.
At this juncture that hardly looks likely, despite the growing size of the US trade deficit and the risk that foreign investors will not be prepared to finance it for very much longer. It probably doesn't make sense to pile into US equities at these levels, but until the world changes, nor does it to predict calamity. Foreigners are prepared to keep pouring capital into the US not just because of the lack of alternatives, but also because American business for the time being seems to offer the best chance of innovation, advancement and growth.
The US economy cannot keep growing indefinitely at the present heady pace without a resurgence in price pressures. In a recent speech, Alan Greenspan, chairman of the Federal Reserve, wondered out loud whether the Fed had not over-reacted in cutting interest rates as far as it did in response to the financial turmoil of the autumn.
So far, however, the American economy shows little sign of giving him an excuse to raise them again. Inflation remains stoically in abeyance. There are warning signs; how far, for instance, do zero short-term interest rates in Japan help provide a prop for Wall Street? Bonds have also gone sharply into reverse so far this year. But until there are real grounds for the Fed to act, US equity prices should hold their value.