June 23, 2008 | posted by Michael Baxter in Markets |

As the green shoots of spring first started to show, the roller coaster ride that is the stock markets seemed to come to a halt.

On the 10 March, the Dow fell to 11,740, just 18 points up on the 14 December 2000 level, the peak from the previous boom, before dotcoms bust.

But then, the index just went up. Talk was that we had passed the halfway mark in the credit crisis, that more than half of all the total number of related write-downs which would eventually be announced had been revealed.

And the Dow soared– hitting 13,058 in early May. Sure, the index was well down on its all-time high of 14,164 set last October, but at least it was within 10 per cent of that peak.

The FTSE 100 hit its nadir a week later. On 17 March it had fallen to just 5,414, 1,500 points below the all-time high of 6,930 set on the last day of the last century.

By 19 May, the FTSE was standing at 6,376.

It seemed the great bear run was over.

But one dissenter was George Soros. You may recall, at the time he made headlines when he talked about the worst financial crisis since the 1930s, about how we were paying the price for 25 years of policy mistakes – of over reliance on the rate of interest.

He also predicted a second dip in the stock markets.

Well in some parts of the world, in China for example, the markets have just gone down and down since then. But then the Chinese stock market was a bubble. It had bubble written all over it. We said so. Lots of people said so. Some Chinese people said, “In China it is different, you are applying Western ideas to China.” But, of course, it was a bubble, and it has burst.

But it was supposed to be like that in the UK and US. P/e ratios are low. In fact, so low have p/e ratios fallen, that Barratt actually saw its market capitalisation fall below projected profits for the year.

But while house builders have seen their share price fall – quite ridiculously, really; people say Gordon Brown did not fix the UK’s roof when the sun was shining, but what about house builders. They have had ten years of plenty, and now analysts are panicking over their stability.

But, at close of play on Friday, the Dow stood at just 11,842, just 140 points above the year low. The FTSE 100 was down to 5,620, 200 points above the year low.

And this is one of the curious things of this saga. It is now eight and a half years since the FTSE 100 peaked. The Dow is only just over the peak from eight years ago. This, at a time of falling house prices.

The collapse of asset prices is symptomatic of a 1930s-type crisis – which was characterised by deflation.

Now, stock markets are not good at telling the future. Economist Paul Samuelson once famously said: “The stock market has forecasted 9 of the last 4 recessions.”

The recent surge in stock prices, on the verge of such a major economic slowdown, also seemed daft.

It took 25 years for the stock market to recover from the 1929 crash. It does sometimes feel as though the stock market has still not recovered from the 1999/2000 crash.

The housing boom that followed that crash may have just disguised the true story.