Waiting for the next shoe to drop!

Business is lousy in the City and on Wall Street these days, and yet stock prices tell a different story: one of relentless optimism about the outlook for profits. Yet at sea a flat calm is usually comes before a storm. In Dubai we even had an earthquake yesterday and the skyscrapers were evacuated.

Lightening can strike like a bolt from the blue. The most obvious potential bombshell is the coming collapse of Lehman Brothers, though nobody cares to talk about a patient on the critical list’s chances of survival.

If it comes, I suppose the optimists must be reasoning, then good old Hank Paulson will have carefully calculated the position and decided to let Lehman go. The impact will be more of a clearing of the air than a financial panic.

We will see about that. Financial crises have an average lifetime of at least three years, so this one is barely into year two. What appears to be happening – as if the potential $200 billion bail-out of Fannie Mae and Freddie Mac is not enough proof – is a huge exercise in manipulation and market support.

But will this hold up? The analogy that springs to mind is the boy with his finger in the dyke. Take away that support and all hell will break lose.

At the moment everything going on in the US is coloured by the battle for the presidency, and who will ‘Take the Hill’. There is a not irrational theory that if the balancing act can last until polling day on November 4th then the incumbent will take the presidency – incumbent parties with a strong stock market have an 80 per cent success rate.

But none of this tinkering and manipulation and showering taxpayers money on problems is guaranteed to work. In markets excesses have to be purged and then rebuilt from a bottom. We have not seen that purge yet, but it can not be long in coming.

When it does anybody who had dumped their gold and silver position this week is going to be crying into their beer for a second time. Fortune favors the brave and wise, not the foolish. We will see in the months ahead who is right on this.