July 14, 2008 | posted by Michael Baxter in Markets |

And so the FTSE 100 hit bear territory. At close of play on Friday, it was 21 per cent below last year’s high point.

It is a little curious, but the Dow Jones is also down from its high point by almost exactly the same margin.

When you think about it, the US economy is in a right royal mess. The latest mess to come on the heels of the previous mess is, of course, the troubles of Fannie Mae and Freddie Mac.

And the amount of money entailed is just staggering. The US government is to ask Congress for unlimited authority to prop up the two financial institutions. It may need an awful lot. The not so dynamic duo guarantee more than $5.3 trillion worth of mortgages. To put that in context, US national debt is only $9 trillion.

It is not surprising they are in so much trouble. As mortgage defaults surge, they are left picking up the bill. But, they really can’t be allowed to fail. At least, not go bust. That really would be a disaster for the US economy that could set back an economic recovery for years and years. So, money has to be dished out – money that makes the Northern Rock bail out seem like a walk in the park. Even the US government will notice this one.

And yet, with the terrible fear dangling like the sword of Damocles, the Dow Jones suffers no more of a disaster than the FTSE 100.

In fact, in a way, the Dow’s performance is better. Last year, the Dow hit an all-time high. The FTSE still failed to climb above the 6,930 mark seen on the last day of the last millennium.

Right now, the Dow is 21.6 per cent down from its all-time high, set last year. The FTSE 100 is 24 per cent down from its all-time high, set on 31 January 1999.

The truth is, the FTSE 100 has not just entered bear territory at all; it never left it in the first place. And its dreadful performance of the last few weeks is a reflection of the lack of confidence by the City in the banks and builders. And that, in turn, is a reflection of how much faith the City has in house prices.