Is the Big Bust yet to come?

The trading week from February 26 to March 2 was fascinating and chastening. Some have seen it as bringing an end to complacency; but has it been more than that?

In some ways, it undoubtedly has been. Once again, we were impressed with how some unlikely development - something that we had not really focused on - was responsible for a sudden, severe shudder in global markets.

There were few who had their eyes focused on what was happening in the Shanghai stock market - or at least focused in any way beyond what was happening to day-to-day stock movements. There were worries about capital-gains taxes but few anticipated any serious run-on effect from those worries to the local Chinese market and then, lo and behold, to Wall Street and other major world markets.

But there was this run-on and that indicates to us again - yet again - how unpredictable may be the causes - the proximate stimulants - to major turnarounds or crises or collapses in world markets.

What we must ask now is whether we were in the midst of or at the beginning of a major market collapse - one affecting most markets around the world. Are we now, as we look forward, on the edge of a major crisis or collapse?

The actual figures for the percentage drop in the Dow and other stock markets are not too terrifying in historical terms. We have come through worse in the past without any ultimate catastrophe.

After the first shock in Shanghai, there have been after-shocks, more especially in Asia and Europe than in the United States, but these have not been of such a magnitude as to spark a global panic.

Nevertheless, we should perhaps investigate a little more deeply than that. Perhaps we should look less exclusively at the statistical record of the actual stock-market movements themselves - the market dropped 200 points for a percentage fall of 3 per cent or whatever - and more closely at some of the side effects.

One phenomenon of which we must be particularly aware is that of the carry trade, a phenomenon that has grown - blown itself up - enormously in recent months and years and that has been at the centre of much of the "liquidity" that has been sloshing around in a variety of markets. Capital flows linked to the carry trade have nourished housing markets, stock and bond markets, art markets and, for example, have helped to close the gap in trade and payments between what the United States receives from abroad monthly and what it pays out.

To some extent - and it may be to an important extent - the carry trade has been helping to hold the rather fragile global financial "system" together.

The key to this fascinating and apparently crucial trade is that there should be a sufficient margin between borrowing and lending rates and no more than a tolerable risk that the margin will be diminished or destroyed. The decisive borrowing environment in the recent past has been Japan, with near to zero borrowing rates and an exchange rate that has been low and tending to be moved still lower by the very operation of the carry-trade phenomenon itself.

A crucial question therefore must be what has the recent flurry on global stock markets done to the value of the Japanese yen and to the assurance with which the carry traders can continue to pursue their exploitation of this highly rewarding arbitrage.