Who's behind the global credit bubble?

The Bear Stearns hedge fund debacle is still weighing heavy on the market's mind - but it's not the only worry. From property to art (left) and wine, there are bubbles everywhere. And fear is growing...

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The storm warnings are coming thick and fast.

The Telegraph business section this morning has a distinctly bearish tone - even by The Telegraph's standards.

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We're certainly not ones to criticise - it's refreshing to see the concerns we've been raising for a considerable length of time now getting a serious airing in the mainstream press.

The Bear Stearns hedge fund debacle, which we covered extensively last week (see The US hard landing just got harder (/file/31298/the-us-hard-landing-just-got-harder.html) for more details) is weighing heavy on the market's mind - but it's not the only worry

"The bursting of a bubble is obvious in hindsight."

The art bubble is just one of many bubbles that comes under scrutiny in this morning's Telegraph. Tom Stevenson talks about Monet and Andy Warhol. But he's not admiring their work, he's marvelling at the prices being paid for them.

With Monet's Waterloo Bridge fetching £17.9m and Warhol's Green Car Crash selling for $71m last month, it's no surprise that commentators are increasingly wondering if the art market is signaling a top in other markets (you can see what Bill Bonner makes of it all in this week's issue of MoneyWeek click here to subscribe: Three-week free trial). In 1990, the Japan's very own car crash was signaled when Japanese paper tycoon Ryoei Siato paid £50m for a Van Gogh.

Stevenson also points to soaring wine and property prices, fueled by the soaring wealth of private equity and hedge fund managers. Their wealth in turn has been fueled by "a tidal wave of cheap cash" which has allowed them to borrow vast sums to fund "the most spectacular takeover boom for 20 years All the most dangerously inflated bubbles today are spin-offs of this global credit binge."

Trouble is, the credit binge may be about to turn into a credit bust. The troubles at Bear Stearns, not to mention the slump in private equity giant Blackstone's share price, are showing up the shaky foundations on which our current "golden era" economy is built.

The ever-reliable Ambrose Evans-Pritchard doesn't pull any punches in his column. "Wobbles are turning to fear. Just $3bn of $20bn junk bonds planned for issue last week were actually sold The last few months look like the final blow-off peak of an enormous credit balloon."

He pins the blame for the global liquidity flood squarely on central banks.

"They fixed' the price of money too low in the 1990s, prevented a liquidation purge to clear the dotcom excesses, then kept rates too low again from 2003 to 2006."

In case you're wondering exactly what he means by a "liquidation purge", let's go back to the big book of Austrian economics to remind us of exactly why cheap money is a bad thing.

Basically, if you've got too much money floating around, you get careless about where you invest it. That creates bad investment decisions, and mis-allocation of resources' - in other words, money is invested inefficiently. Usually, when money is invested inefficiently - in other words, in creating something that no one actually needs - then the investor in question loses money and a lesson is learned about what the market wants and what it doesnt want.

But if there's a big flood of cash just waiting to go somewhere, then it'll prop up the bad investments along with the good. And so nobody goes to the wall, and the system goes on becoming more and more bloated and inefficient, until suddenly everyone realises that the Emperor's got no clothes, and you have a bust - exactly as happened with the dotcoms.

Even then, the flood of money didn't dry up, it just found somewhere else to go - property being a prime example.

As Evans-Pritchard puts it, by keeping interest rates too low for too long, "bureaucrats (yes, Alan Greenspan) have distorted market signals, leading to the warped behaviour we see all around us you bake slumps into the pie when you let credit booms run wild. You can put the day of reckoning off, as the Fed did in 2003, but not forever, and not without other costs."

We couldn't have said it better ourselves. You can read his whole column here it's well worth a look: Government-created monster starting to show its teeth.

And now that rates are rising and fear is rapidly catching up on greed, it looks like we won't have long to wait before we reap what our central banks have sowed.

As Capital Economics' Roger Bootle puts it, also in The Telegraph: "This Thursday rates will rise to 5.75%. But they won't stop there. Reach for your tin hats."

Turning to the wider markets

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London stocks were boosted by a good start on Wall Street on Friday, retracing earlier losses. The FTSE 100 added 36 points to close at 6,607 and the broader indices were also higher. Northern Rock recovered some of the losses made earlier in the week and added nearly 5%, topping the FTSE risers. For a full market report, see: London market close.

On the Continent, the Paris CAC-40 closed 23 points higher, at 6,054, whilst the Frankfurt DAX-30 added 85 points to close at 8,007.

Across the Atlantic, US stocks fell back from an earlier rally as the higher crude price weighed. The Dow Jones was 13 points lower, at 13,408. The tech-heavy Nasdaq was 5 points lower, at 2,603, despite gains for Apple and iPod-maker Research in Motion. And the S&P 500 was 2 points lower, at 1,503.

In Asia, the Japanese Nikkei achieved small gains today, adding 7 points to close at 18,146. In Hong Kong, meanwhile, the Hang Seng was closed today for a public holiday.

Having gained over $1 in New York on Friday, crude oil was steady at $70.69 this morning. In London, Brent spot was at $72.83 a barrel.

Spot gold was little-changed at $648.90 this morning and silver had risen to $12.41. (For a fuller gold market report, click here: Investing in gold.)

In the currency markets, sterling approached a 26-year peak this morning on expectations of a rate hike later on this week. The pound climbed as high as $2.0114 against the dollar but had since fallen back to 2.0086, whilst it was last trading at 1.4813 against the euro. And the dollar was at 0.7373 against the euro and 122.62 against the Japanese yen.

And in London this morning, a survey by Hometrack showed that UK house prices rose at their slowest rate since December in June, rising by just 0.3% to an average of £176,100. Meanwhile, in a Bloomberg survey of 60 economists, 53 said they expect the Bank of England to hike interest rates to 5.75% on Tuesday.

And our two recommended articles for today...

Could you profit from the new Apple i-phone?

- Thousands may have queued up to buy Apple's new iPhone last Friday, but don't rush out and buy expensive shares in Apple. To find out the best places to invest to cash in on the i-phone phenomenon, click here: Could you profit from the new Apple i-phone?

Will increased fund flexibility benefit retail investors?

- Companies such as Northern Rock, BAE Systems and GlaxoSmithKline who have delivered bad news in recent weeks have been particularly harshly treated by the stockmarket. And it's all down to some investment rule changes. For Jeremy Batstone's analysis of the impact UCITS 3 is having on the way funds operate, click here: Will lincreased fund flexibility benefit retail investors?

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.