But, unfortunately, broken record or no, this is the frustrating reality, and there is little that I can do here month by month but reflect it. The global economy is now in a sort of stasis, awaiting the denouement in America. A stasis by the way which is being deliberately maintained by coordinated international intervention in the financial markets: witness the unadmitted but obvious cooperation between the USA and Japan to stabilise the crucial dollar:yen exchange rate, and the unproven but highly probable international campaign to head off any upward trend in the price of gold bullion. And China, which after twenty straight months and counting of price deflation, has not devalued its currency - a concession it has made in return for assurances about the value of the yen (and presumably other, primarily political, considerations). The aim is to buy time: it is hoped by those behind these policies that the crisis economies of Asia in particular -shielded behind a stable yen and supported by the ongoing boom in America - will have been able to implement financial and economic reforms and become strong enough to cope before things go sour on Wall Street. Governments and central banks are attempting and hoping to avoid a global depression.

For this interpretation to make sense, we have to be sure that the international financial power brokers do expect a denouement. Well, there have been warnings of unrealistic stock prices emanating from sources such as the World Bank and US Federal Reserve Chairman Alan Greenspan for two years or more. I have quoted them in the past. Then on June 17th the Bank of England chimed in. In its report on financial stability it said " We consider the issue of equity market valuations and ask whether stock prices in the US (and the UK) might embody unrealistic expectations of future dividend growth. No one can be very confident in this area, but some indications raise questions about the level of the market." The same day, in his testimony on monetary policy and the economic outlook (before the Joint Economic Committee, U.S. Congress ) Alan Greenspan left no serious remaining doubt that he is gravely concerned with stock market ( and real estate ) speculation. Although he was very careful to remain ambiguous and avoid explicitly declaring the stock market a bubble - no Federal Reserve Chairman would do any such thing on the record - his speech was peppered with references to "unsustainable asset prices", "excess", "bubbles" and "history", which, in the context that he used them, leave no doubt that that is the opinion of the FOMC.

One of the most characteristic features of asset price crashes is in fact their astonishing unpredictability. We can often be confident that a particular market is severely overvalued, and that prices are unsustainable, but there seems to be a trade-off that has to be paid for this increased confidence in the form of increasingly uncertain timing. The preceding bubbles go on much longer and grow much bigger than any "rational" analyst could possibly anticipate. The current mania is certainly no exception: it is already littered with the corpses of failed crash predictions. There is no reason that it cannot continue for another 6 to 18 months, or more. Dow 12000. 15000. 18000. It is all possible. But the market could just as well break next week.

There were plenty of warnings given in the USA from 1924 on, and the story is similar in every case that I myself have lived through and observed - 1987 stocks, 1989/90 Japan, the 1980s real estate bubble, the earlier craze in collectables such as rare postage stamps. But the timing of the break in the market is almost never signalled: not even with 20:20 hindsight, which is the really telling fact. Despite the enormous amount of research done on them, the immediate causes of the 1987 and 1929 crashes on Wall Street both remain unknown: we simply do not know why they happened on the days that they did. The answer, if one is ever found, will come from mass psychology - not from finance or traditional economics. Once a market has reached the point where it is totally disconnected from reality and the only driving force is investor psychology, there is no point in putting forward fundamentalist arguments as to why it might be near the top. Possibly some skilled and perceptive chartist, pouring over his Elliott Waves and candlesticks, will spot the spectral traces of the first shift in mood - see the first one or two individuals on the edge of the herd raise their heads, sniff, and scent the mortal danger on the wind.

Y2K is unlikely to be a factor by the way. It is being well signalled. The specific factors that trigger a crash are, as I said at the outset, never signalled. If Y2K does become a factor, its effect on the market will occur at some utterly unexpected point.

There is however one set of circumstances that I am monitoring that might give us advance warning. That is if the US Fed eventually decides that it has to take action and end the party. I think that they may signal their intent in advance. I am looking for evidence of first (a) a decision by the US Fed that the balance of risks favours popping the bubble, followed (b) subtle signals, mainly ignored by the markets, that it is their intent to do so in the near future:-

They are very worried indeed about the level of asset prices, and are treading very, very cautiously to avoid panicking the market and triggering the crash. Alan Greenspan knows that many people think that signs of inflation and a consequential series of aggressive interest rate increases are what will end the bull market, so he now signals an upcoming move, monitors the reaction, and only goes ahead with it if the markets remain calm. Note how carefully stage managed the tiny 25 b.p. increase on June 30th was. It was only a 25 b.p. reversal of the emergency 75 b.p. decrease last year, hardly significant at all in itself, yet the waters were tested very carefully in advance, and we even had a simultaneous announcement that the committee had shifted back to a neutral bias. That was done because there was some evidence in the preceding days that investors were getting edgy about the possibility of a series of rate increases. It is as simple as that.

The US financial authorities know that a crash is inevitable. But they want to delay it until the global economy is perceived as strong enough to withstand the shock. As Greenspan himself said, Asia remains "fragile". But, at the same time, as he unambiguously made clear on June 17th, the level of asset prices in America is seen as the major imbalance threatening the maintenance of maximum sustainable domestic economic growth. At some point the domestic risk will, in the opinion of the FOMC, outweigh the international, and - provided it has not happened spontaneously by then - they will pop the bubble. Presumably by a sharp increase in interest rates. So, from now on we should switch our reading of the entrails from an effort to gauge the FOMC's interest rate bias to instead gauging their "bubble popping" bias.

Just to be clear about what Alan Greenspan said on June 17th in reference to the threat posed by asset prices to sustainable economic growth in America. First, in a series of comments about bubbles and " unsustainable asset prices" he explained why the FOMC have not yet directed action specifically against rising financial asset prices. Essentially, he said this is (a) because it was difficult to be sure that it actually was a bubble, (b) targeting action against rising asset prices was judged as unnecessarily risking maximum sustainable economic growth, and (c) they know what to do after a bubble bursts anyway. But he also signalled that the balance of probabilities is shifting, because unsustainable asset prices are now creating imbalances that threaten the central policy goal of maximum sustainable growth. Here are his own words:-

o the persistence of certain imbalances pose a risk to the longer-run outlook.

He goes on to say what (he believes) these imbalances are:-

o Despite its extraordinary acceleration, labor productivity has not grown fast enough to accommodate the increased demand for labor induced by the exceptional strength in demand for goods and services.

o That last development represents an unsustainable trend that has been produced by an inclination of households and firms to increase their spending on goods and services beyond the gains in their income from production.

Then he tells us what (he believes) is causing them:-

o That propensity to spend, in turn, has been spurred by the rise in equity and home prices.

Some commentators have interpreted these passages to mean that a bubble popping decision has already been taken. It hasn't. I do not even think that they have yet shifted to a bubble popping bias. But they are moving in that direction.

This interpretation is short-term bullish for the US stock market. But I do not share Wall Street's long-term bullish interpretation. Which is that small preemptive interest rate increases are intended to stop inflation in its tracks and keep the party going indefinitely. This is wrong. Let us be clear what Alan Greenspan said - someday the bubble is going to burst. When it does then the authorities will act to try to ameliorate the economic consequences. They are not going to prop up share prices indefinitely! He does not mean that! Instead he made it clear that rising asset prices are causing unsustainabilities: so this has to stop eventually. Got it?

"The bursting of the Japanese bubble a decade ago did not lead immediately to sharp contractions in output or a significant rise in unemployment. Arguably, it was the subsequent failure to address the damage to the financial system in a timely manner that caused Japan's current economic problems. Likewise, while the stock market crash of 1929 was destabilising, most analysts attribute the Great Depression to ensuing failures of policy. And certainly the crash of October 1987 left little lasting imprint on the American economy.

This all leads to the conclusion that monetary policy is best primarily focused on stability of the general level of prices of goods and services as the most credible means to achieve sustainable economic growth. Should volatile asset prices cause problems, policy is probably best positioned to address the consequences when the economy is working from a base of stable product prices."
(Alan Greenspan, June 17th testimony).

What does Alan Greenspan think that "address the consequences" means for the stock market I wonder? This is a bit of a mystery. Think about it. If he is implying that he foresees a scenario analogous to the 1987 crash - a sharp fall in the market followed by recovery in a matter of months - then we will merely be back where we started. That outcome is at odds with what he said about the current trend being unsustainable. But if he foresees the stock market falling to fair value, which at present levels means a collapse of 50% or more, and staying there then it is very hard to make a case that economically "the consequences" will be anything but very severe indeed. Or perhaps he believes that the market can be artificially manipulated to hold at some middle ground, not too hot and not too cold, until real value catches up through natural economic growth? But it is in the nature of manias that they cannot end that way: and this one has already gone too far to realistically expect such an outcome. None of these scenarios add up.

We seem to have taken the wrong turning somewhere and ended up in a rather peculiar blind alley. How did we get here? Well, the reason is that we have been led here, like a bull with a ring through its nose, by Alan Greenspan himself. The testimony that I have been referring to and analysing above gives some very valuable insights into how FOMC members are thinking, and how their policy is likely to evolve, but we must be very careful not to be seduced into accepting it at face value when it comes to understanding what is really going on in the markets and the economy. The whole speech was an apologia. Alan Greenspan was primarily putting forth his explanation why nothing has been done to prevent the bubble. He was, in other words, getting his excuses in early. (Robert Rubin bailed out instead!)

His excuse can be summed up concisely, as follows:- Bubbles are hard to recognise as they grow ( a daft excuse: so are the early signs of inflation and everything else about which the FOMC has to exercise its judgment and decide policy). And it is known how to deal with them after they collapse. So the best thing to do is focus only on price inflation, and deal with the consequences of asset price bubbles after the fact. The decade of economic prosperity resulting from this strategy has justified it.

What Greenspan, and the others, have either failed to recognise or cynically ignored is that, economically damaging as price inflation is, asset price bubbles are much worse. The Austrian School economists explained this a long time ago. The prosperity created as the bubble grows is an illusion. It works for a time, but the eventual price to be paid far exceeds the temporary benefits. The economic damage is all done during the growth of the bubble, not, as implied by Greenspan's logic, by the crash.

Knowing this, we are in a much better position to predict the outcome. What follows is of course stylised but none of it is extreme. This is a reasonable picture of the crash and its aftermath:-

(1) The Wall Street trading day opens as usual. There has been selling in Asia, the indices there are down, but nothing frightening. The European bourses are slow, with few orders trading: it looks a slow day ahead there. After the opening bell in New York, there is the usual level of sell orders piling up, nothing remarkable there, but there are no buyers. Within minutes a wave of animal fear sweeps through. Now, everyone wants to sell. The total volume of sell orders is not yet massive, but without buyers there is no market. It locks solid. As the news spreads, sell orders accelerate. By the end of the trading session, what trades have been consummated are at prices averaging 25% below the previous day's close.

(2) Early in the session the President's Working Group on Financial Markets has swung into action. Unlike on the previous occasions this time there is no surreptitious buying of S&P options contracts, but as events unfold on this and subsequent days there is a massive injection of liquidity to prevent the whole US financial market system seizing up. With events moving so quickly, overextended banks and other financial institutions are not only experiencing huge losses but do not know how big these will be by the end of the day, nor whether their counterparties and creditors will be able to meet their obligations. No one wants to pay anything to anyone, thus threatening to bring the whole system crashing down. What the Fed does is to "inject liquidity" - it buys government debt (mainly T-bills) from the institutions' holdings, thus providing them with the liquid cash to meet their obligations. This guarantee from the Fed provides the cash and confidence to keep the system flowing. And where does the Fed get all that cash? It simply creates it - there is a telephone call, a sale is agreed, so many million dollars worth of government debt is credited to the Fed's account, and the payment consists simply of a credit to the institution's cash account. Both sides of the transaction are nothing but computer entries. The banks can also borrow from the discount window: this money too is simply created on demand by the Federal Reserve system.

(3) In the next few days, despite some brief rallies, markets slide by 50%, then begin to stabilise. There have been one or two failures of hedge funds and other financial firms, but the massive cash flows from the Federal Reserve system have kept all the major banks and others afloat, and a systemic failure of the financial system has been avoided. Slowly and cautiously at first buyers appear and, over a period of several months, the prices of stocks rise again.

(4) But, in the initial slide, wealth equivalent to more than six months of US GDP simply evaporated. Individuals and corporations throughout America suddenly realise they are not as financially well-off as they thought. Although at first there is no obvious sign of deep economic damage, there are many individual bankruptcies. Gun shy now, consumers and businesses stop spending, the consumer boom and business investment boom that were driving the US economy starts to slow and then falter. Projects are put on hold: demand for business loans dries up.

(4) The banking system, coping with large losses and a worrying increase in non-performing loan portfolios, becomes very reluctant to make new business loans. There are few requests anyway, and even sound projects are being rejected.

(5) The stock market continues to climb as the real economy slides into recession. But it is no longer being driven by the psychology of mania - it is cautious, and, as the evidence grows that a recession looms, prices - which have never regained their peak - begin to slide again. After a long nasty bear market lasting many months, the market bottoms 80% below its pre-crash peak. How long it stays there now depends on government policy.

In Part B, I will look at how interest rates, bonds, currencies and foreign equities may behave.

Greenspan has signalled that a Wall Street Crash is on the way, but not yet. Current policy is to delay it until the global economy is healthier. Yen:dollar exchange rate is being controlled (stabilised) to assist the crisis economies. Hence my short-term outlook is one of near stasis: US equities will continue up, bonds will remain mostly weak, Asian equities are likely to continue to slowly strengthen, European bourses will move up too, but gains will likely be cancelled out by continued currency weakness, the euro will continue weak, the dollar will continue to strengthen, the yen (because it is now being held in a narrow trading range against the dollar) will rise against other currencies, the pound will weaken against the dollar and strengthen against the euro, the Canadian dollar will hold its own for now. Gold bullion price will not rise significantly, and may be driven down further.