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Toil and bubble

One of my favourites jokes from Not the Nine O’clock News has the US apologising for turning up late for the first two world wars and promising to make up for it by being really early for the next one. Financial journalists work in a similar way when it comes to spotting asset bubbles.

And yes, of course, we are not terribly good at spotting bubbles which, to be fair, is something we have in common with nearly all of Her Majesty’s financial services industry.

In the last 10 years, we have turned up late for technology, property and commodities – to name but three – but we are still determined to be really early for the next one.

Mind you, even when we are on the money, you could miss it. Take the splendid example of an article by journalist Steven A Holmes, published in the New York Times on September 30, 1999, which did a pretty impressive job of predicting the sub-prime crisis.

“In moving, even tentatively, into this new area of lending,” he wrote, “Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times, but the government-subsidised corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loans industry in the 1980s.”

Now there is something it would be nice to be able to point to on a CV but I suppose the law of averages means journalists have to get it right sometimes. It is a bit like having 1,000 monkeys bashing away at 1,000 typewriters – eventually they will come up with last November’s feedback statement on the retail distribution review.

The trouble, of course, with bubbles is they are tricksy. If you think you have spotted one, then almost by definition it is not one and so you have not. Still, as I say, that will not stop people trying and indeed this very newspaper had a go a short while back, speculating whether the recent flood of money into corporate bond funds might constitute a bubble.

That had occurred to me also – if only because, when investors start acting in unison, alarm bells ring. As we discussed a few weeks ago, a herd mentality works well in terms of evolutionary success on the plains of Africa but tends to be less effective for investment success in the Isas of Middle England.

So recently, when I met up with Jim Leaviss, head of retail fixed income at M&G and a fund manager on the group’s global fixed-interest desk, I asked him whether all the cash heading into corporate bond funds might be a cause for concern?

He suggested that economic factors surrounding bonds – particularly deflation and very wide spreads – meant it was not legitimate to talk in terms of bubbles and, with the caveat this was an issue that bond fund managers should always bear in mind, added: “If we got to the point where money was coming in and credit valuations did not look attractive, it would be a concern but it is not like we are seeing a flood of money and companies trading at price/ earnings ratios of 200, like in the tech bubble.”

Ah, whatever happened to the New Paradigm? Anyway, I later found myself chairing the London leg of the latest Investment Update roadshow and thought I had put the bubble question to Asley Goldblatt, fixed-income product specialist at Legal & General Investment Management. Yes, apparently it is not just M&G that runs bond funds. I know, you could have knocked me down with a feather.

I really should have left it to the advisers in the audience because his short sharp response, which I have had to blank from my memory, indicated my question was the fixed- income equivalent of asking an astronomer if the moon is really made of Stilton.

Relenting a little later, and in a bid to coax me out from my new hiding place behind the lectern, he extended his answer to point out that, since the global corporate bond market dwarfs its equity equivalent, the UK retail investor’s new love for bonds is unlikely to have much effect. A convincing line, I feel, and pop goes my chance to call a bubble. This time.

Julian Marr is editorial director of marketing-hub.co.uk

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