Investment Bubbles or just Burble - Nowhere to hide?

A good friend of mine living the expatriate highlife has been pushing the bear case for western stock markets hard recently - which has proved to be a very expensive mistake for him. Even so, I still read a number of reports pushing the "October Effect" which, as far as I can make out, is far from proven. Despite my reservations, I can't deny that 1929, 1987 and 2008 all saw their roots in an October crash. Illogical to believe that this is a pattern - three times in a century? Yes, very illogical - but who ever said markets were logical?

One similarity between the present and these three events does worry me. For reasons I have often propounded before, I think that equity markets are almost the only home for much of the liquidity sloshing around in the system (and the talk of QE2 promises even more!!). In all of the crash years previously we had not dissimilar situations of momentum. The reasons were different in all three cases, but the result was the same - there was strong momentum caused only partially by good fundamentals, whilst a lot of that momentum was for the reason that it was the only place to be. Investors and Fund Managers have, overall and with some laudable exceptions, a herd mentality.

The crashes in all these cases did take place from a starting point of genuine strength, The dog was wagging the tail - but any crash of serious magnitude can cause a cascade of events - usually concerning liquidity and/or loss of business confidence that can have the tail wagging the dog in the blink of an eye.

My message? Just a counsel of caution. The current run is justified on most econometric measures - but quantitatively is 300-ish points ahead of itself on the FTSE and almost 1000 points on the Dow. Recent sharp reversals have proved great buying opportunities - but a "Black Swan" event is incubated in just these situations.

Dum Spiro Spero.