As an addict of the US financial channel CNBC, one never fails to be impressed by the eternal optimism on display.
Even now with the key equity indexes close to the peaks of last year, the pundits, many of them fund managers, cannot help themselves but be optimistic.
The present view is that the Standard & Poor’s 500, the broader measure of share prices, is being driven ever higher on better than expected earnings.
Peaking? A combination of Trump corporate tax cuts and the US economy expanding like a train is driving share values
A combination of Trump corporate tax cuts and the US economy expanding like a train is driving share values. Share buybacks, dividends and bonuses soared by $305billion (£215billion) in the first quarter of this year, disappointing those who hoped the proceeds of tax savings would head into investment and benefit workforces.
But one cannot but feel that all of this is like dancing on the deck of the Titanic. Share prices cannot go on rising forever, especially when the boom is partly driven by higher leverage, with institutional investors having borrowed up to $1trillion at super-low interest rates.
As a result of the financial crisis, banks have been made much safer by being forced to hold more capital, and the quality of assets they hold has improved immeasurably. Banks hold a lot more government bonds and the risky stuff has been passed on to the mutual funds.
Indeed, some 50 per cent of the assets in the financial system are now held by savings vehicles such as mutual funds. That should not be worrying, except that global banking regulators worry that supervisors of equity markets, such as the Securities & Exchange Commission in the US, have been less rigorous in making sure the system is safe.
Securities regulators tend to be more concerned with catching wrongdoers, but less focused on capital risk. Occasionally there is a glimpse of the vulnerability.
In 2006 there was a problem with securities created for General Motors. The markets shuddered but quickly recovered.
But it provided some forewarning (largely ignored) of the bigger problem of ‘structured investment vehicles’ which detonated like cluster bombs in the financial crisis.
This year the market turbulence in February around the VIX products, designed to protect investors against volatility, zoomed into view. Several funds saw calamitous collapses but the system steadied itself and the losses were absorbed.
Such incidents offer insight into what could happen if there were to be an unexpected shock. Holding more capital is no guarantee the banks will be able to shield themselves from the next crisis.
However, no one can say they have not been stress-tested to death. The same cannot be said for mutual funds, ETFs and other saving vehicles. The lack of liquidity in investment funds can be a critical problem.
We cannot predict what would trigger a mutual fund sell-off. It could be an interest rate hike that exposes the dangers of investing in leveraged securities, or it could be an ETF going horribly wrong and raising concerns about the whole sector.
Equally it could be recognition that the wall of money that has gone into emerging market funds could be lost if high debt to national output ratios in developing nations mean they can no longer meet interest rate exposures.
On paper at least, after a decade of hard work by Mark Carney’s Financial Stability Board, the global financial system has been rendered safer.
The danger is that the risks have just been moved from one bucket to another and that mutual funds may be even less able to weather the storm than banks.
Be worried, very worried.