Market insight: Be bullish and watch the bears impale themselves By Ken Fisher Updated: 6:42 p.m. ET July 17, 2007 Headlines herald a US prime-time, subprime mortgage implosion leading to an upcoming credit-crunch crisis â destined to sink shares, raise interest rates and impale economies. But this is demonstrable nonsense. Yes, there have been media autopsies of the few notable subprime lenders who have gone belly up. More are certainly in the wings. But what makes this a systemic problem? If subprime is to ripple systemically into a crisis, it is a take-it-to-the-bank certainty that we will see vast credit-spread widening. Yet spreads between high quality and low quality debt of the same maturity â by any measure â are at near record lows, in spite of six months of subprime hand-wringing. And the biggest single days of upside volatility have been historically very subdued â about 10 to 20 basis points. Every true credit crisis in history had huge spikes in credit spreads early on and â while not always â usually well before equities implode. By contrast, wrong-headed credit fear babble blows through history like the wind without a ripple in credit spreads. Take 1998, for example. The spread between US government intermediate rates and corporate junk bounced tightly around 3.5 per cent in the year's front half â nothing notable. Then, Long Term Capital Management, a Â£2.3bn hedge fund, failed, igniting fears that the entire industry was infected. The spread ran straight up all summer to almost 7 per cent, and global stocks corrected a gut-churning 20 per cent. The spread warned you. But within weeks it fell back, as crisis was averted and stocks rebounded. The credit spread's short-lived peak signalled the market crisis would be similarly short lived â the S&P 500 ended 1998 and 1999 up 29 per cent and 21 per cent respectively. Fast forward: that same spread started 2000 at just under 4 per cent but rose all year. By May, it was over 5 per cent and by year-end over 8.5 per cent, signalling trouble. Yes, tech tumbled. But the broader market wasn't much infected until after credit spreads spiked â a much broader spread than 1998's short-lived crisis, warning of the devastating 2001-2002 stock market decimation ahead. Throughout 2001, the spread bounced between 6.5 per cent and 8.5 per cent as stocks churned downward globally. Amazingly, after September 11 2001, credit spreads dropped below 5 per cent â and stocks rallied strongly through year-end and the short, shallow US (and global) recession ended. But anyone lulled into a sanguine state was warned again as the spread spiked again in mid-2002 to near-previous highs and then plateaued as stocks moved lower. Spreads next narrowed for all 2003 as stocks surged globally, starting in March, and global economies boomed. Since 2003, spreads have remained in a very narrow, low band with minimal volatility around a 3 per cent average. They are now up from April at 3.3 per cent but down from year-end and lower than 12 or 24 months ago. So, if we are to have a systemic crisis, beyond a few badly mismanaged mortgage companies, we must see credit spreads widen wildly. And we haven't. Might we? It is possible. But without spreads widening hugely, bet on the bearish talk being wrong. When people are bearish about a false factor it is bullish and that is what I see today. What about upcoming potential bankrupt subprime lenders? There is always someone free-falling in a bull market. Always. It might as well be some mortgage companies as anyone else. But you know that it isn't a widespread problem that takes down the market and economy by the spreads. Fact is, subprime is a relatively small part of the overall debt market and the talk is much ado about little. And if I'm wrong about that? Then you get those widening spreads to warn you. And take cover fast. Until then, be bullish and enjoy watching the bears impale themselves. They are good at it. We have been hammered with subprime headlines, yet stocks are buoyant, earnings strong and the global economy galloping. So bring on the hype and headlines. The more there are, the more bullish it is. The headlines, coupled to a lack of credit-spread widening, is just one of many reasons I remain very bullish for the remainder of 2007. Ken Fisher is the chief executive of Fisher Investments and author of "The Only Three Questions that Count". Copyright The Financial Times Ltd. All rights reserved.