Outlook: Bubble or not?

EDDIE GEORGE, Governor of the Bank of England, reckons investorsneed strong nerves. In a speech the day before yesterday he warnedof further storm clouds looming over financial markets. The reactionwas pretty telling - the FTSE-100 index leapt by more than 2 percent. It was similar to the way technology stocks reacted to thepundits' verdict, on their midweek setback, that the internet bubblehad burst. It might do one day, but it certainly hasn't yet.

The question as to whether or not there is a bubble, bound toburst eventually, in US share prices, has become key to predictingwhat will happen to the world economy. It seems a slender thread,but share prices of over- hyped companies like Amazon.com could provethe bellwether for jobs and growth in the rest of the world.

If Wall Street and Nasdaq take a serious dive, the US economymight follow, and it has never been more true that if Americasneezes, the rest of us will catch cold. To the casual glance, achart of the Dow over ten years makes it plain that there is abubble. The line climbs gently until it soars exponentially fromearly 1996. Can there be any justification for it?The answer at one level is that, whether warranted or not, thereis little to burst the bubble until the Federal Reserve raisesinterest rates. As things stand, there is nothing on the horizon toset Mr Greenspan sharpening his needle. Inflation is as remote as ithas ever been - not one of the usual danger signals, from commodityprices to wage pressures, is flashing.At a psychological level, people divide into gut optimists andpessimists about the right level for equities. Americans tend to beoptimists about the existence of a "new economy", justifying at leasta part of the gains on Wall Street. So do people who work closelywith the new technologies. They see their businesses expanding sofast they can hardly keep up. As for the pessimists, they keep onbanging on about the "unstainability" of the American economicmiracle. For how much longer can foreign capital be expected to keepfinancing the US's spending binge?This column's position on these matters is perhaps not aparticularly helpful one. It is not comfortable to be caught betweentwo stools when the two positions seem to be diverging further andfurther, but doing the mental splits is the only intellectuallyhonest stance at the moment. As long as cheap money and the ongoingprospect of it remains the dominant feature of developed economies,equity markets should hold firm, albeit with plenty of turbulencealong the way.