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  1. Wealth
May 11, 2009

The bull market is bull

By Spear's

A touch of Spring in the air, a smell of profit, and no sooner are the bulls up, off and running.

A touch of Spring in the air, some new green grass on the pastures, a smell of profit, and no sooner are the bulls up, off and running. Markets on both sides of the Atlantic rose in April by nearly 10%, led by financials.

Financials? Yup! Only a third of the top US twenty banks failed their stress-tests, you see, but unfortunately this posse of dunces included two of the biggest, Citigroup and Bank of America.

And when the legendary Anthony Bolton, the star at Fidelity in London, says all the basics are in place for a sustained bull market, who are we to doubt it?

‘All the basics in place?’!

Don’t tell Alastair Darling that, or he’ll start dreaming of winning the next election! The first basic not in place is the UK public finances, now consuming far too much of GDP, and with a borrowing requirement that will squeeze out the private sector, assuming that the new public debt can find takers.

And it’s no better in the Eurozone, where the banking crisis is now being revealed as being as bad as in the Anglo-sphere world, especially in the biggest economy of Germany, which is now forecasting a contraction in GDP of 6.0% in 2009.

Germany goes to the polls in September and Ireland holds a referendum in October on Lisbon, all of which could cause stress in the Eurozone. And in America the consumer is still in hibernation, and likely to remain so for the next two years, as the credit markets are not operating as normal, with many saying along with the IMF that the US banks need another trillion in capital.

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This column has long argued that this slump is like no other since the 1930s. At the macro-natural level, this column has argued that 2009 is the recession at the end of the Short Cycle of nine years, but this one coincides with the downturn in the Long Cycle of ninety years, which could have adverse effects for the next ten years (see Gordon Fool in WMS 9).

Added to this macro-possibility is the fact that this slump is a global recession wrapped in a banking crisis, and it is important not to conflate the two or your portfolio might suffer from premature emasculation.

It goes like this: the banks started croaking on toxic waste assets from September 2007 onwards – Bear Stearns, Northern Rock, HSBC’s Household Finance and all that – and according to many commentators are still only half-way through their liquidity crisis with at least another round or two of bail-outs to follow.

The real Anglo-sphere economy, however, went into recession in Q4 2008, promptly followed by the rest of the global economy in Q1 2009. Now add the ongoing banking crisis to the growing global recession and ask yourself that question: ‘Are all the basics in place?’

This slump of two separate elements is beginning to look more like a W than a V, with the April rally looking like the first uptick in the W. Come Qs3/4, however, the markets could be delivering a double-whammy and going down for the second leg of the W double-dipper, shattering confidence and giving everyone a good dunking in time for Christmas.

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