Analysts pretty close to saying 'we don't know'

Serious Money: We are used to the idea that for markets to exist there must be at least two completely opposing views as to the worth of any given asset. Markets need both buyers and sellers.

Indeed, one or two analysts cheerfully admit that if you think long and hard enough about the value of any financial instrument you can usually end up seeing both sides of the argument. Whether something is a buy or a sell is often a roll of the dice, even after lengthy analysis.

Of course, not many investment professionals are willing to admit this. Our industry is based on the belief that research will bring its own reward. So, many people spend far too much of their lives thinking about every possible driver of share prices and end up hopelessly confused. Rather than admit this, they then flip a mental coin and allow that to determine the investment decision.

In some ways I have often thought that less is more: I may be getting tired and lazy, but I am convinced that we could all be as effective if we did far less. Our decisions would be just as sound - perhaps even more so - if we put less into them. Far too many people end up not seeing the wood for the trees.

But this is an old debate, one that I will never win. Arguing that we should work less hard will always invite suspicions of my motives. One part of this debate we hear far less about is the need to admit "we don't know".

How many analysts are asked all sorts of questions to which the only honest answer is "I don't have a clue"? To admit that a given problem is simply too hard to solve is the ultimate no-no for all investment professionals. It's the first lesson we are taught.

So imagine my surprise when I read, in the International Herald Tribune, someone by the name of V Anantha Nageswaran, chief investment officer at Libran Asset Management in Singapore, saying that "we're now only guessing why markets are behaving as they are". This is as close to an "I don't know" as I have ever seen.

In his defence, Mr Nageswaran probably meant that he believes that stock markets should be going down but seeing as they are not, it would be a bit arrogant to argue that he is right and everybody else is wrong (which, to be fair, is the conventional way of doing things).

Mr Nageswaran's comments appeared in an article that accurately reflected current conventional wisdom: "There seem to be only two possible explanations of global stock markets. Either they are on an ever more reckless binge that has no logical grounding, or they are operating on the basis of a new set of assumptions about conditions that used to be considered dangerous."

I'm not sure whether these comments also amount to "I don't know", but they come pretty close.

What the author, Patrick L. Smith, is confused about is why markets can be going up at a time when global interest rates and oil prices are also on the rise.

Historically, these three things typically do not go up together. So, assuming that history is a good guide to the future, we have a combination of market movements that are either inexplicable or unsustainable.

One possible explanation is that the past is not necessarily a prologue. But this is one argument, a bit like "I don't know", that we are not allowed to use.

One legacy of the dotcom bubble is that anyone who suggests that it could be different this time is immediately fired. As a result, we are all slaves to imperfect recollections of history.

To be fair to Patrick L. Smith, he highlights the changing nature of a very complex debate in an accessible way. In particular, he draws attention to the different ways in which respected economists are beginning to account for the simple fact that the "unsustainable" US trade imbalances have proved to be anything but. These learned folks have begun to speculate that globalisation has changed the way the global economy works. Gosh.

But it is nice to see a new trend emerging: as markets continue to rise, one or two thoughtful people, like Mr Smith, are demanding that the "permabears" justify their views. Nobody typifies those pessimistic analysts like Andy Xie of Morgan Stanley (and his boss, chief economist Steve Roach).

The permabears have an easy - dare I say lazy - explanation for the current buoyancy of world stock markets: it's another bubble. And because it is a bubble, a nasty accident is simply a matter of time. It's 2000 all over again.

But there are enough intelligent people willing to flirt with the idea that it really is different this time and we need to take an alternative view. The academic community distinguished itself during the internet bubble by refusing to be sucked into discussions of a new paradigm. But leading thinkers from places like Harvard and the Federal Reserve have begun to speculate about how the world might be quite a different place from the one described by the traditional textbooks.

I think the real legacy of the dotcom craze is an analytical community primed to spot bubbles where none exist. According to the bubble merchants, the deflating bubble in bonds will sooner or later deflate the bubble in equities. The dollar is a bubble waiting to burst.

The bursting bubble of the global housing market will be an inevitable part of this process. Google is the ultimate bubble stock. Trouble is guys, Google is trading at close to $440.

Chris Johns is an investment strategist with Collins Stewart.