RJH writes...

There's a satisfaction about stock market bulls as they digest the latest US economic data. Real debt burdens down for both renters and homeowners over the last year (Federal Reserve data); definite job growth; and, unsurprisingly given the first two items, enormous consumer confidence numbers. Debt bubble? What debt bubble? The case for economic health is (again) fluently made by Wachovia Bank's Economics Group on the excellent foreign exchange site FXStreet.com.

Alan Greenspan, in danger of being labelled Economic Advisor to the Bush Re-election Team, further helped matters last week in his testimony on Capitol Hill - "the current account deficit is not a problem" and words to the effect that record housing stats were no cause for concern.

Doomsayers fears are clearly misplaced in light of these facts.

Imagine for a moment that you inhabit a place experiencing negative real interest rates. What do you do? It's a no-brainer. You go out to your friendly neighbourhood Wachovia-like bank, take on new debt, refinance old debt and spend the rest like it's going out of fashion. If inclined to worry about the nest egg you might even buy a few sexy dividend-yielding stocks. Why on earth would anyone sit on dull piss-for-interest cash in the bank? No - you party like it's 1999. Again.

Is any of that a problem?

If a banker is a chap who lends umbrellas when the sun is out and takes them away when the rain falls, then debt is indeed a fair weather friend. Yet rates have been so low for so long that many have forgotten the dangers of leverage, or rationalise them away on the basis that this time things are different. Nonetheless, the dangers are clear.

Higher interest rates in the US will erode American consumption; huge actual personal and national debt levels and their over-stimulation by easy Fed money and political calculation in the US will have to unwind; the impact of cooling Asian economies, especially China's, on both the US dollar and US consumers will not help; geopolitical risk in the shape of terrorism and local mid-east politics continues; and let's not forget the spring-cleaning effect in 2005 and 2006 of whichever US administration is elected (Jeremy Grantham of GMO investment management enlightens).

Alongside these questions, there is surely no argument that right now - in July 2004 - all asset classes in the UK and the US are historically expensive be they small or large capitalised shares, property or bonds. Commodities, too, are expensive which begs a further question - for how long will those companies that yet can continue to be able to pass along the increased cost of their inputs?

So, there are obstacles ahead, and there is not great margin for error. Will the market crash? Who knows, but equally who truly wants to bet this year on all pitfalls being avoided? There is too much risk for the potential returns. Boring, but safe, advice demands the preservation of investment cash until asset prices (as measured by value ratios) cheapen. It may take 18 to 24 months - bar some interim catastrophe - but it might then prove possible to make the most of a truly rare chance to buy spectacularly low.

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