Three years from crash, markets recover as fears fade
Just over three years since the markets hit rock bottom, it is clear that anyone who was canny enough to spot it could have made handsome returns: a 97% gain on the Dow, a 66% return on the FTSE and a 40% rise in the Nikkei.
The Brics have matched and exceeded these: Brazil has gained 75%, Russia's RTS is up 170% and India 113%. China's Shenzhen Composite is up over 100% from its lowest point which was in February 2009. Hong Kong is up 87%.
The past three years for the equity markets has been a triumph of optimism over experience.
By March 2009 the prospect of financial Armageddon following the collapse of Lehman's was still a very real threat. But for many it had started to recede.
If you still believed that we were all going to hell in a hand basket, well, equities were never going to be cheap enough. But if you accepted the worst was over, then that was the moment the signs started to emerge that there was going to be a recovery.
Citibank reported that it had been operating at a profit through the first two months of the year for the first time since the third quarter of 2007 - the last time it recorded a profit.
The Shiller p/e index, which records the average ratio of equity prices to their earnings over a 10-year period hit 13 - anything below 16 has traditionally been seen as a buying signal. And the market turned.
"There were two elements to the recovery, particularly in the US. Companies had cut costs so efficiently that when turnover increased," said Jonathan Bell, investment strategist at Stanhope Capital.
"There was no increase in employment or costs and profits fed straight through to the bottom line with rapidly increasing margins. The second element was that with the banks writing off huge amounts, when that was over, the percentage gain in profits was very rapid indeed."
But the crisis took a new turn - centred on Europe.
By the end of 2010 the catastrophe of the mortgage-backed securities market was being replaced in investors' minds by the dire state of the European sovereign debt market.
The following year at the European Central Bank (ECB), Jean Claude Tricket in his final months as president, started raising interest rates.
He was worried by rising prices in Germany, but he ignored the fact that the periphery economies of the eurozone were falling deeper in to recession.
In August last year the equity markets plummeted.
It wasn't just a eurozone problem. The debt crisis in Greece, Portugal, Ireland and other periphery economies was affecting everyone. The US in particular was dancing to Europe's discordant tune.
But the tune changed: Mario Draghi took the helm at the ECB - and almost immediately cut interest rates.
In December and February the Long Term Refinancing Operations (LTRO), through which the ECB offered cheap money to any bank who wanted it for up to three years, reinvigorated the markets.
It didn't work instantly. The December auction was greeted with huge suspicion. Many banks worried that they would be labelled as desperate for cash if they took the loans.
Others thought the operation would merely keep alive banks that would be better off dead. One commentator likened the ECB's auction to "performing a puppet show with a corpse".
But for the equity markets it brought the stability they needed. The banks could carry out the simplest and most profitable of "carry trades", borrowing from the ECB at 1% and buying say Italian or Spanish bonds or quality corporate bonds, yielding say 5%. Netting the difference between the two gives them a chance to rebuild balance sheets over the next three years.
Result: profit margins of 3% plus on billions of dollars invested, and a chance to rebuild balance sheets over the next three years.
And with the money pouring into government bonds, Spanish and Italian bond yields have fallen dramatically. The key to the markets' return to health has been cheap money.
"Ever since 1980 the driving force behind equities has been low inflation and low interest rates. In this crisis interest rates have collapsed, while earnings have held up surprisingly well. Dividends are above bond yields. The stock market is a more attractive place to put your money than a deposit account," said Mr Bell.
The unknown quantity in the coming months and years is inflation.
The huge amount of cash that has been injected into the European economy through the LTROs is supposed to merely replace the interbank lending that has dried up. The effect on Eurozone money supply is thought to be neutral.
All the same, if the head of the Federal Reserve is anything to go by central bankers are going to be a lot more flexible over inflation targets.
Bernanke's "balanced approach" is directed towards getting jobs and inflation stable. Well, inflation in the US is close to the 2% target. Unemployment is over 8% and should be between 5.25 and 6%.
If the jobs numbers are to come in line, in Europe or the US, policy makers are going to have to ignore inflation - for the time being.