Personal finance: Clinton seems to think that, if we find enough air, the balloon can keep on inflating

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The Independent Online
COULD IT be that a new source of money to chase the US market even higher has been found? It seems that Bill Clinton wishes to invest welfare funds that provide pensions for public servants and the poor in the stockmarket to improve returns received.

Nice idea Bill, but you appear to have upset Alan Greenspan, the influential chairman of the Federal Reserve Bank, which is never a good move. And it remains to be seen how Congress would treat such a suggestion.

There is more than a whiff of political manoeuvring in this. The stockmarket is being driven upwards by the baby boomers, anxious to save for their retirement. Bill Clinton is a baby boomer himself, so encouraging people to believe they are doing the right thing already and that there will be more money in the pot for when they retire will not be doing him any harm with middle America.

It is, though, very worrying from the point of view of what it could do to valuation levels. Although the amount of extra money the government is likely to wish to invest in the stockmarket will be significantly less than the current flow into mutual funds, there could be a marginal effect driving valuations still higher. Remember, this week the price earnings multiple on which UK stocks stand hit an all time high.

The trouble with bubbles is that, when they burst, it can be rather unpleasant. The suggestion made by the US President seems to be that, providing we can find enough air, the balloon can keep inflating. This seems to me to be naivety to the point of recklessness, but maybe the imbalance between supply and demand does mean that we will have to get used to higher valuation levels on shares. There is no historical reason to believe that how shares are valued has to be determined by what has gone on before. Still, it feels uncomfortable when you move into uncharted waters, even if your heart tells you that this year's extravagant rating will turn into next year's valuation norm.

Unfortunately, what was a re-rating based on investment returns is turning into a valuation base that owes more to availability than real prospects.

Pension funds necessarily have to invest. By and large their liabilities extend over a number of years - and for a variety of people who are living longer. Whether or not it is right to divert welfare funds into the stockmarket, the fact remains that money is becoming available for investment at a time when opportunities are, if anything, contracting. I find this the only justification for markets to be at the level they are.

In Japan when this happened, the bubble did burst and Mrs Watanabe took to keeping savings in a sock. Deflation would make this a sensible investment move, but the developed world needs a healthy stockmarket. So Dave from Denver will probably be deterred from cramming dollars into his Doc Martens - even if Bill from Washington fails in diverting cash from Treasury bonds to Mutual Funds.

Brian Tora is the Chairman of the Greig Middleton Investment Strategy Committee

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