Money will, of course, remain cheap. Indeed, the forward market now forecasts that the Federal Reserve will not raise interest rates this year. But it has been cheap for a long time. It has already driven massive amounts into equities and reduced volatility to historical lows. In early January, the options put-to-call ratio reached levels indicating that no-one wanted to take out any insurance against equity markets falling. However, the recent turn in these indicators suggests that a wall of worry is now being built.
Fed chairman Alan Greenspan and president George W Bush are busy pumping up the leaky equity and real-estate bubbles. They can postpone their collapse but they won't be able to blow them up any bigger.
The bulls claim improvements in US household and corporate balance sheets will ensure economic growth hits the 4.6% now predicted for 2004. True, the turnround has been dramatic. Households have gained $3.5 trillion in net worth (mainly from equities), since the lows of autumn 2002. And US corporations don't need to borrow to invest: cashflow is so strong that they now have a financing surplus.
However, consumption is being fuelled by more debt rather than sustainable labour income. That's unsurprising ? the Fed has slashed interest rates and foreign central banks' insatiable demand for treasuries has driven down mortgage rates.
Meanwhile, US Inc has made no attempt to restore jobs lost since the recession. Income from work in rich countries will stay under pressure from poor employment levels and the competitive pressures of China and India.
Surveys show companies are optimistic. Equities have had a good run and economic growth has surged. But the double-digit rate of business investment growth in the past few quarters isn't that inspiring compared with economic activity and the recovery seen in corporate profits. Capital expenditure as a share of GDP is still languishing at lows.
It's no secret that the US twin deficits are deteriorating. The US government is gambling on a mix of strong growth to recoup revenues and holding down discretionary spending. Neither will be achieved. That will stretch the patience of foreign investors, which have gorged themselves on the policies served up by Bush. Net US external debt is now about 30% of GDP and overseas investors hold 42% of government debt.
Foreign investors stopped buying into US Inc years ago ? overseas purchases of US equities totalled just $27 billion in the year to November, 86% below their peak. Instead, they ? in particular Japan ? have financed the US external deficit by buying fixed-income instruments. In the past six months, Japan's foreign currency reserves have risen $369 billion on an annualized basis. Japan cannot be counted on to keep intervening at these levels.
The US imbalances are close to blowing up. Then, fixed-income yields will rise and the dollar will plummet. Currency turmoil will also be bad news for global equities.
Then there is geopolitics. The Madrid atrocity confirms our forecast that rising risk will sorely tax long-term financial assets. The building blocks are slipping into place, in Madrid, but also in nuclearizing North Korea.
They are also present in the destabilization of the Middle East, the chaos of Iraq and the lose-lose option that the US is offering the oil-rich Gulf states: democratize or die.
Another worry is that the weak recovery will stop economic reform in its tracks. Both Bush and his presidential rival John Kerry are inept when it comes to the global economy. Kerry is the more dangerous of the two on the domestic economy. In foreign policy, it is the opposite ? Kerry favours international cooperation; Bush adopts unilateralist neo-conservatism.
Kerry is going to take the election to the wire and the markets won't like that. His "job protection" policies are just plain protectionism and capital controls. But they could get him elected. He also proposes soak-the-rich tax policies that always hit equity markets. And they won't help the budget deficit because they will damage wealth and consumer demand.
Bush has been doing a thorough job of supply-side sabotage, but Kerry would be even worse for the dollar. Over the next four years, the US will need well over 10% of the world's annual savings to finance its deficits. That will not flow readily to a country busy undoing the architecture of its supply-side miracle. So the deficits will become unfinanceable at current interest rates and today's dollar exchange rate.
The stage when worry gets "in the price" is nearly with us.