End of the bull market?

Infosys' disappointing "guidance" may have been the push that set off the avalanche of selling in the market on Friday, but there has probably been a fundamental change in global market conditions.

That conjecture seems to be borne out by the worldwide nature of the meltdown. The immediate reasons for the weakness are many and varied""the Infosys guidance pulled down the market in India, IBM's disappointing results torpedoed the Dow, and falling commodity prices wrecked the Bovespa in Brazil.

Other reasons cited for the crash included the International Monetary Fund's prognosis of slower global growth and weak economic data from the US.

At the same time, the US market ignored GE's strong earnings growth, just as the Indian market pulled down not only tech stocks but also stocks in the completely unrelated banking sector.

The market also ignored the fall in the price of crude oil. It is ironic that while the markets were fretting about the US Federal Reserve raising interest rates too rapidly three weeks ago, they are now worrying about slower growth, which should dampen inflation and remove the reason for faster interest rate increases.

Amidst this welter of confusing and often contradictory reactions, one message comes through loud and clear""the markets are extremely nervous.

This is the third time in the past one year that the markets have crashed""they had earlier crashed when the US Federal Reserve decided to raise interest rates last May, and then again when the dollar started firming in January.

But perhaps the main reason behind the nervousness is the fact that the global liquidity cycle has taken a turn for the worse.

After the tech wreck of 2000, the US Federal Reserve had let loose a tsunami of liquidity, ably supported by the record deficits of the US federal government on the one hand, and supportive action by central banks around the world, on the other.

The aim was to ensure that the crash of the New Economy did not result in a deep recession. That aim was achieved, with the added bonus that financial assets across the world, from emerging market stocks to commodities to bonds, jumped sharply in value.

Extraordinarily low rates of interest spawned hedge funds and the carry trade, raising money cheaply in the US to invest in assets across the globe.

Cheap credit fuelled a consumption and housing boom in the US and other developed countries, the mirror image of which was Asian, especially Chinese, exports to the US and an investment boom in China.

The upshot was low interest rates, high demand, high earnings growth for companies, high asset prices, and high GDP growth.

That global "sweet spot" is now behind us. With monetary tightening by the US and other central banks, liquidity has begun to ebb, and interest rates are rising.

At the same time, with the withdrawal of the monetary and fiscal stimulus, growth is slowing down, but is not yet slow enough to lower oil prices.

Structural factors like the entry of China and India into the global economy keep a lid on inflation, but prices have been inching up. Meanwhile, higher raw material prices are hurting companies. Earnings growth is decelerating. Hedge funds are unwinding their carry trades.

Add to that the uncertainty caused by massive global imbalances such as the huge US current account deficit and the investment bubble in China. In short, the risks in all markets are rising, and it is this sense of heightened risk that is behind these recurring crashes.