Since the start of 2010, the world's stock markets have taken more abuse than an unwary aide at 10 Downing Street.
From fears over a Greek default and the collapse of the euro, to worries over tightening monetary policy in China and even the US, the warning signs are coming thick and fast that the end of the party is drawing near.
Yet the market's not ready to give up the ghost yet. Investors seem to have taken last week's gentle hike in one Federal Reserve interest rate as a sign that things are getting back to normal.
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To the bulls, it's good news however you look at it. On the one hand, it's not a particularly strenuous tightening measure, and the Fed says it has no plans to up other rates soon. On the other hand, the fact that the central bank felt it could spring a surprise like this at all suggests Ben Bernanke is confident in the future.
But we wouldn't be so sure about that...
Money printing has done little to kick-start the economy
Stock markets seem to have recovered their poise. The initial shock over the Fed hiking its 'discount' rate (Interest rates are rising in the US) from 0.5% to 0.75% has given way to new optimism. Yes, rates are rising. But it's a 'technical' move. And the Fed has no plans to raise rates soon. And it's good that it can even think about getting back to normal anyway.
But the trouble is that monetary conditions are nowhere near normal. The Fed has been printing money like mad. Yet there's still little sign that all the money printing has actually done much to kick-start the broader economy.
In fact, Jamie Dannhauser of Lombard Street Research argued earlier this month that the rally in markets hasn't been down to "excess liquidity" being pumped into them at all. He points out that the money supplies in the US, Europe and Japan have been "at best, flat." In other words, all the pumping isn't actually getting money into the 'real' economy.
He says that the rebound has been purely down to investors breathing a sigh of relief. The world didn't end, and so stocks have rebounded. That's not to say that slashing interest rates hasn't had any effect. Near-zero rates have boosted share and other asset prices because they make cash seem unattractive compared to almost anything else. "Investors fled to cash in the wake of the Lehman debacle (i.e. demand to hold money rocketed); as panic ebbed away, investors found themselves sitting on spare cash and subsequently rebalanced their portfolios in favour of risky assets."
Banks have become black holes
The trouble is, says Dannhauser, that this can't last. If the money supply isn't expanding, then at some point, the rally will simply run out of cash to fuel it. "A sustainable bull market requires consistent growth in the supply of money without growth in the money stock, any 'excess' cash will quickly be used up and the rally will stall."
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And we seem to be approaching that position. In January, the Bank of America/Merrill Lynch fund manager survey showed that "cash ratios are exceptionally low". They're not quite as low as they were at the stock market peak in October 2007. But back then, says Dannhauser, money supply was still growing at double-digit rates. Now the M3 broad money supply in the US for example, is shrinking rapidly, falling by 5.6% over the past three months or so.
MoneyWeek regular James Ferguson has been pointing out the threat posed by the shrinking money supply for months. If you're a regular reader, you'll know James's arguments by now. If not, you can refresh your memory here.
The short version is that despite the best efforts of the central banks and government, banks are reluctant to lend. For one thing, their current and potential dodgy debts are too high. So what they really want to do is offload risky assets (such as home loans), not take more on. And on top of this, regulators are tightening up on rules governing how much capital banks have to hold on to, which is also forcing them to be more cautious.
In effect, the banks have become black holes, sucking in whatever money the government can throw at them. "The basic point," says Dannhauser, "is that while banks continue to deleverage and money supplies move sideways, risk assets remain extremely vulnerable to a change in risk appetite."
Why we're betting on the dollar to keep rising
When that happens, whatever the trigger, then investors will run to the safest havens they know. And the fact that the US has even hinted at higher interest rates, suggests that the dollar will be one of those havens during the next spasm of fear.
So we'd be betting on the dollar continuing to strengthen this year, regardless of the longer-term picture for the currency (for more on how high it might go, see my colleague Dominic Frisby's piece from last week: The euro's plunge shows why you should hold gold). The euro meanwhile is likely to remain under pressure as more twists and turns appear over the Greek saga.
As for sterling after last week's grim news on the public sector deficit for January, the picture for the pound is looking increasingly grim. It's going to become more and more vulnerable to bad news on the political or economic front. And if traders decide at any point that the euro is more the currency of Germany than that of Greece, then they may well shift their gaze to sterling. As Dominic noted last week, it's another reason to hold on to gold.
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