Nobody seems too bothered about anything any more. The Bank of Japan raised rates 0.25% to 0.5% this week. That doesn’t sound like much, I know, but it is a doubling of rates and it does mean the overnight rate is now the highest it has been since 1998. The market didn’t react at all. It’s as though it has forgotten that it was mildly worried about the carry trade a few weeks ago.
The market also isn’t reacting to the astonishing state of affairs in the American sub-prime mortgage market. As Christopher Wood of CSLA points out, 20 specialist sub-prime originators have gone bust since December and the share prices of sub-prime lenders are in freefall (that of America’s second-largest fell 35% last week). Most people seem to think that this is a minor issue, something that will easily be contained in the sector. I can’t see how they can be so sure, particularly given the size and depth of the credit derivatives market. I also can’t see how the market can be so certain that the US house-price crash is over, or why it isn’t going at least to lead to a major growth scare in the US (falling prices mean no refinancing and less spending).
Then there is the UK. The FTSE 100 is at its highest level for six years and the FTSE 250, which is apparently stacked full of takeover targets, hits new highs all the time. It doesn’t seem to matter to investors that interest rates have risen sharply from their low, or that they will probably keep rising. Note that in the US, consumer price inflation for January has just come in above expectations, despite falling energy prices. Why shouldn’t it do the same here? There is no reason why the next rate move in either country should be down rather than up. The fact is that global markets have become shockingly complacent: nothing particularly bad, or even unexpected, has happened for so long that we all rather assume it never will.
This view is borne out by some research from Dresdner Kleinwort. The bank has what it calls a ‘greed and fear index’, which measures the market’s appetite for risk. This index has just hit an all-time high (ie, we care less about risk than we ever have), something that suggests we are in for a nasty shock – a slump in the prices of most risky assets. “Investor euphoria is truly out of control,” strategist James Montier told The Daily Telegraph.
So when might disaster come? Any time, say the Dresdner analysts. And what might precipitate it? Anything, says Dresdner Kleinwort’s Albert Edwards. “At these levels of extremes, a change in wind direction would be enough. You don’t have to be a bear to look at these tea leaves and say I’m going to row to the other side of the river now.”
The index has been right before. Most investors clearly won’t be remotely worried about this, but if you are, have a look at our cover story. Africa may seem like a risky place to have your money, but research from Investec shows that its markets are completely uncorrelated to the rest of the world’s markets. It is an unlikely safe haven, I’ll admit, but perhaps one to consider.