Outlook; Is Wall Street history repeating itself?

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The Independent Online
THERE HAS been much ruminating in the markets and the press this week on whether Robert Rubin's resignation as US Treasury Secretary will come to symbolise the end of the American boom, and by extension that of the great bull market on Wall Street. Even the FT columnist, Sir Samuel Brittan - as considered and cautious an economic commentator as they come - has stuck his neck out to say Wall Street is riding for a fall. On cue, the US yesterday announced its worst inflation figures since October 1990. Is Mr Rubin getting out at the top?

In common with other bears, Sir Samuel draws a parallel between Wall Street now and its performance in the run up to the crash of 1929. The charts themselves are unnerving enough. The Dow in the 1990s almost exactly mirrors the 1920s - proportionately, it has actually risen by even more than it did then. As we approach the turn of the century, valuations on conventional yardsticks are also much higher.

But the similarities don't end there. Any re reading of John Kenneth Galbraith's classic, The Great Crash of 1929, reveals the parallels to be extensive and uncanny. Then as now there was a belief in the power of new industries and the "new economy" to break the old cycle of boom and bust. There was, in the words of one contemporary, a spirit of "vision for the future, of boundless hope and optimism".

The 1920s had their very own versions of Abby Cohen, Goldman Sachs' present- day bull. One was Professor Charles Amos Dice of the Ohio State University who, as Mr Galbraith observes, plainly found the English language inadequate to the task of describing his own euphoria about the market.

On the eve of the crash he wrote: "Led by these mighty knights of the automobile industry, the steel industry, the radio industry and finally joined, in despair, by many professional traders who, after much sack- cloth and ashes, had caught the vision of progress, the Coolidge market has gone forward like the phalanxes of Cyrus, parasang upon parasang, and again parasang upon parasang." Even as the market plunged into the abyss, he was castigating the pessimists for sabotaging a decade of prosperity.

President Coolidge himself was to retire shortly before the crash, but that didn't stop historians later blaming him for the superficial and naive optimism that prevented foresight of the gathering storm. Will Robert Rubin's timing be as good, or the verdict of posterity as harsh? Only time will tell.

The 1920s had their glamour sectors too. For the Internet, telecommunications and computers, read radio, aerospace and automobiles. For Amazon.com, think of Radio Corporation of America. Like Amazon.com, it came to symbolise the speculative frenzy of the time, often rising, or falling, by up to 20 per cent a day. And like Amazon.com, it did this without ever paying a dividend.

However, there are also quite a lot of dissimilarities. The world generally looks a less dangerous place than it was then, though recent events might seem to undermine that view. The Internet phenomenon looks like a crazy hype, but on the whole the level of speculative, leveraged investment in US stock markets is relatively not on anything like the same scale. These days Americans borrow to consume and let the rising stock market make up for their failure to save. This in the end might prove equally disastrous, but it is notably different from what was happening at the tail end of the 1920s.

More importantly, policy makers are much more alive to the dangers than they were. There may be no such thing as the "new economy", but central bankers do genuinely seem to understand the nature of markets and the business cycle better. It is all too possible that but for the Federal Reserve Board's action last autumn in flooding the market with liquidity by cutting interest rates, we would already have had a repeat of 1929. Alan Greenspan's action in co-ordinating a rescue for Long Term Capital Management was equally important in saving the markets from disaster.

On the other hand, central bankers cannot keep saving the markets from themselves for ever, especially when every warning seems to be answered with an even greater display of excess. In any case, with interest rates so low, there's not much room for manoeuvre left on Continental Europe and none at all in Japan. Meanwhile, the US needs another cut in interest rates like a hole in the head. Indeed, if the Fed is looking for an excuse to raise rates, yesterday's inflation figures are as good as they come.

At this stage an outright repeat of 1929 continues to look rather unlikely. The world, we hope, is a wiser, more robust and sophisticated place. Even so, it's hard to see how Mr Rubin's successor, Larry Summers, is going to achieve the gentle let down we all hope for.

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