City & business: It's desperation that drives the markets
The world's largest companies form the last bulwark against chaos
Sunday 10 January 1999
There are specific reasons for the latest surge. In the US, it's the weight of individually managed retirement money raining down on Wall Street at the start of a new tax year. In Europe it's euro-phoria. Happiness with the euro, supposedly, is sucking money run by professional fund managers globally into European companies. Their profit picture has brightened as a result of being forced to lift their game by the denomination of goods in a single currency.
But there are always specific reasons for the latest bull run. Articulating such reasons is the bread and butter of market analysts and newspaper columnists. If we step back and ask what the bull market in the face of forecasts of gloom and doom is fundamentally telling us, the answer becomes opaque.
The most obvious explanation for the market's good spirits is that the market is a leading indicator. Yes, there are serious problems out there - "imbalances" we pundits like to say: depression in Asia, 10.8 per cent unemployment in euroland, a yawning trade deficit in America, the threat of Japan losing its grip. But that's just the way it is.
Against those negatives, you have serious positives in the world economy: an information technology revolution, globalisation, the end of the Cold War, the simplifying fact of the US as sole superpower.
The stock market is up, according to classic theory, because in its blind but far-seeing way it can weigh the positives against the negatives in the Big Picture with greater wisdom than the brainiest, Nobel Prize-winning analyst.
The numbers since 1980 - when the current era of economic history, with the elections of Margaret Thatcher and Ronald Reagan and Paul Volcker's declaration of war on inflation, began - lend support here. In 1982, worldwide gross domestic product stood at $11,000bn (pounds 7,000bn). In 1997, after 15 years of 7 per cent compound annual growth, it stood at $29,000bn.
Still, few would argue that the most recent cyclical upswing in the global economy - which began in the US about the time the Soviet Union collapsed in 1991, and spread to the UK and the rest of Europe several years later - is looking wobbly and tired. The world economy, according to forecasters from the IMF on down, will be shown to have grown by about 2 per cent in 1998, down from 4.1 per cent in 1997. The figure for this year is likely to be less than 2 per cent.
THIS wobbliness leads in nicely to the second great theory explaining the stock market's bullish behaviour. This theory was crystallised by the current Fed chairman, Alan Greenspan, two years ago. Things have been so good for so long, Mr Greenspan hinted, that investors have lost sight of the grim reality - markets go down as well as up. Investors have, in Mr Greenspan's parlance, become irrationally exuberant. They consequently see each fall in the market, ultimately, as an opportunity to pick up shares at bargain prices.
The Irrational Exuberance Theory of the market's behaviour is currently the vogue. There are endless refinements. One is that the rescue of John Meriwether's hedge fund, Long-Term Capital Management, taught bulls that their irra-tional exuberance was warranted. The situation is such now, according to Irrational Exuberance exponents, that if the market ever really looks like it is going to crash, the authorities will step in and prop it up. The correlate of the Irrational Exuberance Theory is that share prices will keep going up and up and up until the Fed really loses control of the situation, whereupon there will be one humongous crash - a crash like no other before it, a crash that will make September 1929, which hard men jumping out of 19th- storey windows, look like a walk in the park.
The problem with this line of thought is that it pays little respect to people's intelligence. It paints a picture of a world in which investors are operating out of a false consciousness - an intellectual construct honed by the Sixties left to explain why the masses did not revolt. Television and Barbie Dolls, so Danny the Red had it, were bamboozling Joe Six Pack into neglecting to man the barricades.
Alternatively, the Irrational Exuberance Humongous Crash theory of the bull market paints a picture of investors trapped in a System leading inevitably to their doom. I don't buy that, either. I don't see why investors shouldn't adjust their views and behaviour according to changing circumstances.
I would like, therefore, to float a third theory explaining the bull market. I don't see investors as irrationally exuberant. I see them as rationally desperate. Given a world order unravelling at alarming speed, where else should investors put their savings except the stock market?
PROFESSIONALS can quibble over bonds versus equities and such. But for the investor in the street and the fund manager who wants to do a decent job then go home to a good bottle of wine, there is only one real hope: that the world's small number of large, global companies form the last bulwark against economic and social chaos. They are, literally, the best bet against the future.
The problem facing rationally desperate investors is not that the markets will become so overvalued that they will one day crash. The problem is that, to remain profitable in the face of an unravelling world order, the global companies are engaged in a series of manoeuvres - cost-cutting, job-shedding, and merging - which touches off more cost-cutting and job- shedding, which just make things worse.
This might seem like just a variant version of gloom and doom. On Friday, after all, the US posted the best jobless rate in four decades. But anyone who has visited America even briefly knows the figures lie. Underneath the blush of prosperity, a growing percentage of Americans are living desperately over-stretched lives. Americans, touchingly, take whatever jobs are going. They work till they drop. But they do drop. One by one.
Translating this phenomenon into market-speak, the likelihood is not that the bull market will end with a crash. The likelihood is that the chaos we see at the fringes of the world economy will eat into its heartland.
The risk is that the stock market's continued strong performance will give elected leaders the illusion of time and space. They will then postpone confronting the unemployment and miserable social conditions of billions in marginal employment.
The risk of a replay of 1929 - an era-defining stock market crash - is much over-rated. The risk that the bear market, when it comes, will last for years is much under-rated.
No melodrama. Just the prospect of an imperceptible slide into a civilisation- sapping depression.
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