City: Waiting for the accident to happen

ON WALL STREET - In recent stock market history, October has always been the cruellest month. I arrived in New York on Monday to witness what many on both sides of the Atlantic believed might be the beginnings of a crash equal in size and devastation to October 1987. The FT-SE 100 share index in London had already fallen more than 100 points during the day, and Wall Street was following it down with frightening speed.

As I settled down to watch the action on CNBC, a 24-hour financial news channel, there was that sense of excitement and anticipation a journalist always feels when by chance he arrives in a city just as a big story is about to break. I have been a bear of Wall Street for more than a year: at last vindication.

But hold on a moment. What was all this? One after another the pundits trooped on to say this was no crash. With stock prices showing red all around, they suggested that in fact this was good news for investors because it provided a great new buying opportunity. Can you believe it? As the stock market crashed through just about every technical support level chartists could invent, the equity strategists seemed interested only in generating fresh commission income.

Never mind the impending presidential elections, never mind plunging stock prices, the weak dollar, the sorry state of the economy, the failure of the lowest interest rates in 30 years to provide any sort of a lift, or even that on any historic basis Wall Street is still horrifically overvalued, never mind any of that: buy while stocks last, they seemed to be saying.

Well, maybe they were right and I was wrong. By the end of the day the market had rebounded more than 80 points, wiping out all but a tiny fraction of the early correction. That kind of fighting talk, however naive and unrealistic, may have prevented a serious setback turning into a rout. But it is also one of the reasons why I believe Wall Street is heading for a major disaster.

As a Brit in a foreign city I feel as if I am witness to some kind of awful impending road accident. From the sidewalk you can see the juggernaut is about to hit the kerb and overturn but the driver carries on, blissfully unaware of his fate.

With the presidential election looming, Wall Street seems to be defying the law of gravity: it floats on hot air. More to the point, it floats on the poor little private investor who has been pouring money into Wall Street over the past couple of years as if there's no tomorrow. For many of them there won't be. Most of them are first-time stock market investors. They don't yet know what it's like to get burnt.

Everywhere there are advertisements urging you to buy, buy, buy. With interest rates so low, there's no point in having cash any longer. Stick it into stocks and shares, everybody tells you. In one advertisement, a spotty adolescent claims that after forking out for some mumbo-jumbo investment system he selected his stock and made money. 'You can too,' he tells his audience.

And they fall for it and invest: in their droves they come, like lambs to the slaughter.

Maybe there won't be another crash, but a protracted bear market is looking increasingly likely. I believe it's only remotely possible that Wall Street will hold its present level. Long- term it is riding for a fall, whatever the outcome of the election. A Clinton victory has in any case already been largely factored into US stock prices. Unless the Bush campaign manages to unearth some pretty horrific skeletons from Clinton's draft-dodging past (it is certainly trying hard enough to do so) or he fouls up something rotten in the series of televised debates due to begin today, he is looking virtually unstoppable.

There is in any case a large proportion of both Wall Street and big business who hold that Clinton will be good for the economy. It would certainly be difficult to be much worse than the present administration. The relationship between financial America and the Democrats could hardly be more different from the stand-off approach that marks the Labour Party and the City. The Democrats have always had a strong following on Wall Street. Bob Rubin, senior partner of Goldman Sachs, bankrolls the Clinton campaign. Lazard Freres and Lehman Brothers are also strongly associated with the campaign. The position is mirrored in big business, where numerous chief executives, most notably John Skulley of Apple Computer, have come out in favour of Clinton.

In practice however I doubt there is going to be a great deal of difference between the two main contenders. Nobody really knows what they stand for economically anyway. With the economy showing no sign of moving out of the doldrums, and the budget deficit growing larger by the day, the politicians will find their room for manoeuvre more restricted than ever. As Barrons, the New York investment magazine, put it: 'In present circumstances, you'd have to be nuts to want to be President.'