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BUTTONWOOD’S daughters had a jolly time recently when their grandparents took them to Lapland to ride on skidoos, dance round fires with elves and visit the “real” Father Christmas. Children often believe in what they want or need to believe in. So, apparently, do adults, especially those who dabble in financial markets. Quite possibly, investors became too fearful of companies and economic prospects at the end of 2002, shunning anything with the merest whiff of risk. Quite probably, they have taken too much on trust in 2003. Those assets that had been shunned as lepers became this year’s must-have buy.

The US Treasury Department provides news and information on the financial markets, including securities, Treasuries yields and public debt. The Federal Reserve and the Department of Commerce give monetary, economic and trade information. The Bank of Japan, the Cabinet Office and the Ministry of Finance give information on Japan's fiscal, monetary and economic policies. Standard & Poor's gives credit-ratings and posts information and research on the financial markets. The Institute for International Economics publishes research on economic-policy issues. Ronald McKinnon, at Stanford University, publishes papers on currencies, exchange rates and the dollar.

Thus did money flood into investment-grade and junk bonds, both of which had their biggest rallies in history, egged on by rising share prices and falling uncertainty about those prices in the form of lower volatility. Thus, too, did money pour into equities. Having fallen sharply in the previous three years, their worst performance since the 1930s depression, this year world equity markets have put in their best performance for 17 years. On Monday, the Nasdaq index of technology stocks closed above 2,000 for the first time since January 2002; and on Tuesday, European shares rose for a sixth straight session to reach new highs for the year. Emerging markets, in particular, have benefited from the wall of foreign money: in dollar terms they have risen by half. Even Japan, that perennial under-achiever, has gone up by about 22% from the start of the year, and by 38% from its lows in April.

Some of the enthusiasm shown by investors is understandable. For one thing, the flood of bankruptcies of big, seemingly established companies slowed to a trickle in 2003, which did wonders for confidence. In the three years to the end of 2002, some 26 investment-grade firms went bust, compared with 45 in the previous 30 years. This year, you would struggle to name a handful: no longer does each day bring new headlines about corporate shenanigans and soured bets on what was known in times past as the “new economy”. True, the odd multinational is still going spectacularly bust—witness the ongoing fraud investigations at Parmalat, an insolvent food-and-dairy group—but the headlines in the past few months have mostly been of a rosier kind: bumper corporate profits, balance-sheet repair after the ravages of the bubble and, above all, the seemingly miraculous economic recovery in America and elsewhere.

There is, in fact, nothing very miraculous about the American recovery, though Buttonwood is surprised at quite how strong it has turned out to be. A massive fiscal stimulus combined with a sharp boost to monetary policy—both from a sustained reduction in short-term interest rates and the hefty trade-weighted fall of the dollar (which this week slipped to a record low against the euro)—has had quite an effect.

Whether recovery is sustainable is another matter. The simple fact is that Americans spend a lot and save almost nothing. That is why their country runs a huge current-account deficit. That is also why Joe Public, after he has forgotten the pain of the last experience, periodically rushes into risky assets again. He needs apparently turbo-charged returns to fund his spending habits. The fall in long- and short-term interest rates has boosted house prices and made Americans feel richer. But in the long term they will have to save more.

Helped by surging profits and rock-bottom interest rates, corporate balance-sheet repair has been happening, but there has probably been more talk than action. That is why the big rating agencies are still downgrading far more companies than they are upgrading. Corporate America (corporate everywhere, indeed) is, in other words, still awash with debt, and rating agencies are less convinced than they were that it will be paid back. Not that this has bothered investors much. Credit spreads—the difference in yield between corporate bonds and Treasuries—have more than halved for investment-grade bonds. The high-yield market no longer yields enough to be given that moniker, such has been the thirst for high-risk, high-return assets.

This thirst for risk has extended around the world and is, Buttonwood is tempted to say, indiscriminate. Foreign, mostly American, investors have been piling into Latin America, Russia, central Europe, China and Japan. Perhaps they will not be fleeced as much as they were in previous episodes, though history is not on their side—and the recent arrest of the boss of Russia’s biggest oil company provides proof, if any were needed, that whatever a country’s growth prospects, in emerging markets property rights are generally someone else’s. Unfashionably, and perhaps against his better judgment, Buttonwood is still bullish on Japan—or at least its equity market, which is still priced for Armageddon.

For now, the world economy is still heavily reliant on America, whose financial markets are replete with risks and seeming paradoxes

Indeed, one of the biggest questions in the coming year is whether Asia can take up more of the slack for powering world growth from America. The region has grown mightily this year and there is no reason why it should not continue to do so as intra-regional trade expands. The sharp rise in commodity prices this year says more about demand in China than it does about inflationary pressures in the West.

For now, though, the world economy is still heavily reliant on America, whose financial markets are replete with risks and seeming paradoxes. This supposed bastion of free trade is rife with protectionism. In an election year, only the brave would bet on the Bush administration resisting calls from interest groups for more of the same. The administration also risks creating a dollar crisis by talking down the value of the dollars it gives back to those investing in the country. That isn’t very clever, given how much America has to borrow from abroad. There are already signs of unhappiness about this: portfolio flows to America have been drying up as the dollar continues to fall. It could get a lot worse.

But the paradox that most concerns Buttonwood is this: why, despite the strong pick-up in growth and growth expectations around the world, the surge in equities and corporate bonds, and the dramatic rise in the price of gold, do ten-year Treasury bonds—the world’s benchmark risk-free asset—yield only a fifth of a percentage point more than they did at the start of 2003? In this, Buttonwood is a little lost—and a little worried.

Don’t believe the hype