As I write this the FTSE 100 is floating at about 6000.
Why is that? Throughout 2006 and 2007 the market averaged 6162 in my calculation - based on FTSE stats. During most of that period most people believed 'we'd never had it so good'. And now we know that was not true. We know our banks are in crisis. We know there is a consumer down turn. We know there will be low or nil growth in real terms. We know that unemployment is likely to rise. We know that the financial sector is going to shed people and they, supposedly, have been driving our economy.
But the FTSE remains almost unaffected. Is that rational? No, of course it isn't.
There are three explanations:
1) The index is wrong (this is plausible - it is regularly revised to only include winners, so giving a false impression of what is really happening);
2) Institutional investors remain committed to stock markets because this is what they've always done and most young people in the City (those sub 40) know nothing else - which says nothing has been learned about herd effects as yet, despite the damage they have already caused;
3) We've set up an unsustainable savings structure for pensions and other purposes which means money has to be placed solely in derivative financial products (and even shares are that) and that there is no way funds can actually be used to invest in real economic activity - meaning financial markets are unrelated to that reality.
I suspect all three explanations are right, in part.
I have pulled everything I have in pensions and the like out of the stock markets. Like banks and housing, there's only one way they can go now. And sometime soon a FTSE 100 index at 6000 is going to appear as mad a reflection of economic reality as banks offering 125% mortgages.