Comment: All the gloom of the good old days

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The Independent Online
It is quite like old times. Not only was it a day of concerted intervention; it was also a day of concerted gloom. Take the intervention first.

The world's central banks have not carried out an exercise like this on the foreign exchanges for so long that the markets had quite forgotten what the effect might be. Yesterday's three bouts of intervention were beautifully timed, catching the market off-balance. The resulting scramble saw - in one of the nicer pieces of market jargon - 'the bears running for cover'.

So far so good. As far as the currency markets are concerned, this display was simply a restatement of the fact that the Group of Seven does have an interest in a reasonably stable currency environment, and that they are prepared to demonstrate this. The world is not operating under a fixed exchange rate system, but since the Louvre Accord of 1987 the central banks have run a managed floating rate system. For most of the time, the floating element is predominant; every now and again the managed element comes to the fore.

Whether this bout of intervention turns the tide of the dollar's decline is far from clear. The gap between US and German short-term interest rates is the highest for 30 years, and that is bound to put pressure on the system. That sort of gap will remain for the rest of this year, maybe longer. But on a three or four- year view the dollar is much more attractive. It is widely accepted as being 30 per cent undervalued on fundamentals, so the currency does not need to move back to its purchasing power parity with the mark to make considerable gains from its present level.

The most sensible view to take would be that while yesterday's lows may be tested again before the year is out, it is unlikely that the dollar will spend many months below DM1.50.


But the central bank action is not just a currency market operation. It was also designed to remind the world that central banks have a general interest in global financial stability. This showed in the way the central bank action helped to check the fall in the European equity markets as the news came through. There is no direct reason why it should do so, for there are no interest rate implications: it was not as though they were signalling concerted cuts in EC interest rates. But the demonstration that they had an interest in stability was itself helpful.

As far as Britain is concerned the intervention was more than helpful, for the country is in serious danger of talking itself into a slump. One of the well-known features of the pound is that, in the short term, it often tends to move with the dollar. The dollar's fall in recent weeks has been an unfortunate additional factor putting presssure on sterling within the ERM. So when the dollar recovered it pulled the pound up with it. Had it not done so, then base rates might well have had to rise. Rationally, a small rise in base rates would not do much damage to the economy, but it would be an unfortunate signal to consumers, house-buyers and the business community at this sensitive stage of the cycle.

It is a sensitive stage because it is always a sensitive stage. It is very important to remember what the country felt like in 1981 at the bottom of the last economic cycle, when the mood of industry in the North of England (as opposed to home- owners in the north of London) was much gloomier than it is now. All recessions have a slightly different profile: this one is longer, but not as deep. What they have in common is that the bottom is marked by a sense of despair.

Yesterday was perhaps the best example yet of concerted gloom. Share markets were down the world over. Here in Britain both consumer confidence and money supply were weak; brokers were starting to cut their forecasts for the equity market; the Wellcome issue was being bad-mouthed; the construction industry was pleading to the Prime Minister; talk of devaluation abounded.

The calls for devaluation in particular should be seen in this light. Whatever the merits of this argument (and this is not the place to go into these), the fact that the fringe soothsayers should be back in the public arena is a sign that there is a market for these people's views. The soothsayers have been around for years, saying the same things, but no one was prepared to buy their goods. It is the general sense of despair that creates that market for them now.


That will change. Meanwhile, there are opportunities for anyone prepared to take the unfashionable view. A good example yesterday of the way in which the recession has created opportunities for contrarians came from Canary Wharf. If one wants a symbol of the 1980s excesses, there can be none better. The collapse was widely predicted. Now it seems not only that there are half a dozen serious buyers for the present buildings, but that there might be a significant value in the rest of the site when that is developed towards the end of the century.

The dangers in the weeks ahead are two-fold. One is that the contrarians are too early. The next boom will be both further away and differently shaped from the last. Because it will take place against a background of low inflation (not just here but world-wide), the profitable opportunities will come from real increases in productivity rather than paper gains from share and property dealing. The one doubt investors should have about buying office space in London is whether there is a fundamental long- term demand for offices.

The other danger is that the British recovery has to take place against an uncertain international background. On paper, a very good argument can be made for Britian as the prime European commercial and manufacturing nation of the 1990s: strength in new and expanding service industries; a slimmed-down heavy engineering sector (unlike Germany); efficient agriculture (unlike the rest of the EC); flexible and reasonably cheap labour costs; Japanese manufacturing technology. Being well-placed for the upturn is fine, but if the world economy is facing a decade of slow growth it will take some time for these benefits to be deployed.

The wise contrarians will see the present gloom as a wonderful opportunity, but they should be prepared to wait to see their visions fulfilled.