HAMISH MCRAE: Enjoy the bull run whereas it lasts

On to 11,000 or 12,000 or beyond? It has been a blistering ascent, with the FTSE100 up nearly 10 per cent this year, a greater gain than any other major share index.

Let’s celebrate that, while recognising it as a long-overdue correction after years of undervaluation. But when you get a bull run like this, it’s time to ask the tough question: what should we look out for that will bring it to an end?

We know an end will come, just as we know the sun will rise in the morning and that there is a global economic cycle. The challenge is to be aware of the structural weaknesses of the financial system, and be sensitive to signals that something is about to give.

Let’s start with the big picture, because while there will always be steps backward in bull markets, what really matters is that global cycle.

It’s a credit cycle as well as an economic one. Right now we are still in the growth phase, but it is in late middle age. Recessions come about every ten years and the last one was in 2020.

It is a two-way relationship: recessions hit markets, but financial disruption leads to recessions, as after the banking crisis of 2008-9. So even if a serious global downturn doesn’t seem to be around the corner, we need to judge which of the various weaknesses in the system matter and which probably don’t.

Bullish: But when you get a bull run like this, it’s time to ask the tough question – what should we look out for that will bring it to an end?

Jamie Dimon, head of JP Morgan Chase, the world’s biggest bank, gave a general warning last week. He said things now felt similar to the three years leading into the 2008 financial crisis in that ‘everyone is making a lot of money, people were leveraging, the sky was the limit’. Some financial firms were ‘doing some dumb things’, he added. He did not of course name them but he did point to one of the areas of particular concern: private credit.

That is a catch-all phrase to describe non-banking enterprises lending directly to other ones, bypassing the banking system.

There’s particular concern over a New York asset manager called Blue Owl Capital at the moment, as its shares have fallen sharply, and in London a non-bank lender called Market Financial Solutions has just gone into administration.

There will be lots more of these and some institutions that should have known better will continue to lose money. But it doesn’t feel that private capital is big enough to bring the whole system down. At least these fears are now in the open. That in itself is good news.

We need to watch the crypto area too. The tough question here is: what would happen if every cryptocurrency were worth zero?

Not much fun for some families, including some rather important US ones, who have become even richer thanks to their holdings. But would this bring down the world’s financial system? My instinct is no, but there will be hidden links no one is aware of.

Then of course there is artificial intelligence. Mercifully the mania of a few months ago is subsiding. Investors are making sensible judgments about the real costs of the investment needed to sustain growth, and where secure profits will be generated.

In terms of applications as opposed to development, they are also asking which areas of activity are protected and which are vulnerable. That helps the Footsie, as most companies on it are in basic industries. However, every structural shift in the world economy generates disruption.

It may well be that job losses will initially outpace job creation. That will put pressure on government finances everywhere and they are already in a mess.

That leads to my biggest worry. The world is awash with debt. Everyone focuses on government debt and rightly so. But that’s just the start. There’s company debt, mortgage debt, credit card debt… on and on. Add the whole lot together and for most countries we’re talking six, seven, eight times national output – with the UK in the middle of the pack.

So what will happen? Governments will try to inflate the debt away. There will be some sort of credit crunch as bond yields rise, and a global downturn that will hit equities as well as bonds. But at least equities give some protection against inflation, and that may be a driver behind this bull market. Enjoy it while it lasts.