Granted, some of those voices of doom have sounded before, concedes Jackson, but that does not necessarily make them wrong.
Rather, we might ask, if people are so anxious, why are the markets so robust?
A good place to start is M&A, where the first quarter has just set another record. Investment bankers insist this will continue, but that tells us nothing. After all, they book their fees upfront. So if the boom looks like ending, all the more reason to bang the drum now.
Chief executives, on the other hand, have to live with their deals rather longer. So why are they so bullish? Perhaps because, as Warren Buffett once remarked, they tend to run high on animal spirits.
As for private equity houses, they too are under pressure to worry later. An illustration of this came last week from Blackstone, which has decided to start booking future performance fees on the day deals are signed. Granted, if Blackstone overstates future fees today it will have to book a corresponding loss later. But the firm is about to go public and by that time the IPO cash will be in the bank.
So one way or another, the M&A boom is central to equity valuations. And according to a survey from the Russell Investment Group, almost 90 per cent of US fund managers think US stocks are fairly priced or cheap. The same is no doubt true in the UK. There may be lots to worry about, investors argue, but at least the equity market looks pretty safe.
Maybe. But self-evidently, the wave of buy-out money is pushing valuations higher than they would otherwise be. Just look at stocks which the market believes are too big to be vulnerable. There has been some heady talk of $100bn buy-outs. But we are not there yet. The biggest so far is $45bn for the Texan utility TXU and the equity part of that is $30bn. Raise that to $50bn and we have a rough and ready threshold.
If we apply that to the UK market by way of example, we find an ominous pattern. There are 17 stocks in the FTSE 100 with a market value of more than £25bn and their weighted average price-earnings ratio is just more than 11. The average for the rest of the FTSE 100 – that is, those companies seen as vulnerable – is more than 16. As for the mid-cap FTSE 250 – where the bulk of buy-out activity is in fact concentrated – the average is 18.
Some might argue this oversimplifies. The top 17 include a lot of oil companies, banks and mining companies, all of which are going through boom times. And since their earnings are cyclical, the multiple on those earnings is correspondingly low.
But that is beside the point. Those 17 companies – almost half the market by value – we may take to be valued according to their fundamentals. The other half are valued on the premise that a wave of cheap money is about to bid at silly prices.
Let us recall that the present credit cycle is in several senses unique, if only because some of the forces driving it – such as derivatives and hedge funds – played nothing like the same role in previous cycles. You can’t really say whether this one will end well or badly.
The wider relevance of this lies in the way the credit cycle has infected all the other asset classes. With equities, we might not appear to be there yet – that is, the earnings yield is still higher than the cost of debt. But that is only true of the market average – and that is distorted by companies too big to be bid for.
As for the rest, if the credit market is underpricing risk, as it surely is, the infection has spread to equities. So if investors are anxious, they are right to be. Indeed, they are perhaps not anxious enough – or at any rate, not about enough things.