The old adage that when America catches a cold the rest of the world suffers from pneumonia remains a truism in today's globalised markets, whether one likes it or not. Since the American stock market bubble burst in early 2000 almost USD 9 trillion dollars has been wiped out from the capitalisation of the US markets.

That is almost equal to one year's GDP and roughly of the same order of magnitude of a wealth wipeout suffered by the Asian tigers in the Asian crisis five years ago. In the case of Thailand, for instance, the stock market suffered an 85 percent fall in local currency terms, equating to a wealth loss of about 85 percent of GDP. However, in Thailand's case, the need to recapitalise the broken banking system amounted to another 20-25 percent GDP, for total wealth losses of well over one year's GDP. Japan's loss of wealth over the past twelve years is even larger, with the stock market having lost 75 percent of its capitalised value and the banking system still crippled after several failed bailout attempts.

Only now, after five years of restructuring, are the crisis affected parts of Asia (excluding Japan) making sustainable recoveries and their markets are still off 75 percent from their all time highs.

Europe has suffered percentage drops in its stock markets indices roughly equal to the falls in America, but the wealth reduction is lower since stock market capitalisation was a considerably percentage of GDP when the bubble burst.

The faith in the cult of the equity has been badly damaged everywhere as an aging population examines a diminished future from reduced pensions and 401k programs. The expected populist reaction to these reduced circumstances is increasing in evidence in the US with demands for accountability from company directors, accountants, auditors, bankers and analysts. If the markets remain down the calls for vengeance are likely to grow ever louder. In the UK there are the first signs of a rebirth in union militancy since the reforms of Mrs. Thatcher twenty years ago. This new militancy is at least partially related to widespread cutbacks in final salary pension plans and a feeling that it is an opportune time for workers to claw back some political power.

But have the markets over reacted on the downside just like they did on upside, or are we just pausing on the downside as we repeat the experience of Japan since its bubble burst? Obviously, no one can predict the markets with certainty.

The evidence for a sustainable long-term recovery is mixed at best and far from compelling. The excesses of the US bubble were so extreme - stock markets capitalisation and other measurements of value in 2000 were a multiple of those in 1929 or even Japan's bubble of the 1980s - that a 45 percent fall in the US market (as measured by the broad-based Standard and Poor's index) does not represent compelling value by longer term standards. The price earnings ratio still seems high by past standards, even if one had confidence in earnings estimates - and confidence has been shot recently. Furthermore dividends, the traditional support for shares in troubled times are still largely missing in America, although in better shape in the United Kingdom.

The economic consequence of the stock market fall have been modest heretofore since those wealth effects have been disguised by the subsequent property bubble that has been cynically fostered by the Greenspan Federal Reserve Board. The Fed believes that the impact of a rise in property prices has three times the impact on consumption of a similar rise in stock market values and this has accounted for the strength of American consumption till now.

But property bubbles cannot be kept aloft indefinitely and the experience of the Japanese and Asian bubbles is that property eventually corrects a few years after the peak in the stock market. There are now clear signs that the property bubbles in both the United States and the UK are near their peaks.

If that is so, then a double dip recession is possible as consumers try to rebuild their shattered balance sheets. To add to the misery, problems in the US banking system and the UK insurance sector could add to the woes making the downturn more akin to the Japanese downturn. In addition, there is uncertainty aplenty on the political front. The Democrats seem likely to win control of both houses of Congress in November assuring domestic gridlock for two years until the next presidential election. As a consequence, George Bush, like his father before him, is increasingly becoming a foreign policy President and seems bound and determined to turn its attention to a war on Iraq. At some point, the law of probabilities says that the easy military successes the US has won in recent years could go badly wrong. Iraq, or the Middle East generally, could be that case.

In view of the all the uncertainties, the markets are probably being quite rational. Only after they get below the levels where Alan Greenspan first talked about irrational exuberance in 1996 (around 6,500 on the Dow Jones) can we talk about rationality again in the United States. The eventual equivalent objective for the S&P 500 seems to be in the 500-550 range, although a good rally from the 750 range seems possible. Volatility seems the most likely outcome.

More and more the United States seems doomed to follow Japan with lower overall growth rates than it has experience in the 1980s and 90s and shorter rebounds followed by relapses. There must be concern that the decline in the overvalued dollar becomes disorderly adding to the instability in the markets and the real global economy. Europe, struggling with the consequences of the fiscal stability pact and a stronger Euro, looks to be sluggish at best, with the old locomotive Germany still in something close to recession and as seemingly impervious to reform as Japan.

But that's the bad news. The good news is that the Asian markets and their economies, excluding Japan, are on the rebound after taking their medicine over the last five years. Whilst an extended US slowdown would still be adverse to them also, they have restructured and with a new emphasis on domestic consumption and regional trade and investment are better situated to withstand such pressures than in the past.

A year ago we wrote that Asian emerging markets seemed likely to outperform developed country markets. That call, lucky or not, has been realised. Whilst Asian markets are undergoing a reaction from their strength earlier in the year, value still favours them and higher prices can be expected next year. We particularly favour Korea and Thailand. Korea is still 25-30 percent below its all time highs set in 1988 at the time of the Seoul Olympics and Thailand down 75 percent from its all time high set in early 1994. There are lessons aplenty here for US investors, if they care to learn them. Our position on gold, as an essential portfolio insurance policy, remains undaunted by the recent sell-off that we see as a normal correction in a budding bull market.